Interactive Brokers is ready to shake up the UK trading market
“Why is it,” Gerald Perez, the UK boss of global brokerage giant Interactive Brokers, told CityAM, “that UK investors can trade anywhere around the world on our platform for less than £3, but other platforms charge £10 for investors to trade in their home market?”
Although it’s currently a fairly small player in the UK market, the company has set its sights on growth in the country, and if peers aren’t already worried, then they should be.
Interactive Brokers takes Wall Street by storm
Interactive Brokers was founded in 1977 by Thomas Peterffy, who remains chairman of the company today.
The group was a first-mover in computerised trading, keeping costs low by directing customer orders directly to stock exchanges around the world, with minimal touch points between the customer and the trade.
Peterffy was born in Budapest, Hungary in 1944 and later moved to the US with the rest of his family, where he quickly developed an understanding of the early computer systems that were starting to emerge. In the 1980s, he developed automated trading systems, using a seat he’d acquired on the American Stock Exchange to trade equity options.
Peterffy was obsessed with using technology to enhance and refine trading while keeping costs as low as possible. This enabled Interactive (known as Timber Hill until 2001) to grab a significant share of the market.
By 1997, Timber Hill traded nearly five per cent of the daily volume in listed equity derivatives. It had just 284 employees. By 2001, the number of transactions running through its platforms had increased tenfold.
Over the next decade, the company continued to expand its presence around the world, focusing on technology to keep costs low. At the end of the first quarter of 2024, it counted 2.75m customers around the world, with customer equity of $467bn and customer margin loans of $51bn.
It was also ranked by hedge fund data provider Preqin as the top prime broker for hedge funds with assets under management (AUM) up to US$50m. It was ranked as the fifth largest provider of prime brokerage services overall by a number of hedge funds, up there with the likes of Goldman Sachs and JP Morgan.
UK growth story
Interactive has had a presence in the UK for decades, mainly as a base for its European operations, but Brexit changed all of that. Following Brexit, the company separated its European and UK operations, and then turned its attention to the UK retail market. Perez tells me that since the company has turned its attention to this market, it’s seen “explosive growth” in demand for ISA and SIPP products. He attributes this growth to Interactive’s proposition on cost and transparency.
The company has always been upfront about costs, prioritising transparency over profit. Perez says the company has been able to take this route as it’s invested so much in the technology that underpins its system. Just over half of the 3,000 staff employed by the group work in tech. The company is dedicated to “continuous improvement” rolling out as many as 20 platform updates a year, and can turn around changes in as little as 24 hours. AI is already used heavily throughout the business to improve and enhance workflows.
Interactive’s UK peers have a long way to go to catch up to the business, and that could drive more of them into the arms of private equity or American buyers.
Hargreaves Landsdown, which recommended a £5.4bn takeover by a CVC-led consortium to shareholders at the beginning of the month, said in 2022 that it would invest £175m in technology over the following five years, upgrading systems and moving data to the cloud. Perez explained this figure was likely far too low, and the company would have to invest a lot more to bring its systems up to scratch.
That, he said, was likely to be one of the reasons why the board was so happy to accept a bid. And Hargreaves isn’t the only company that’s likely going to have to deal with a big tech bill. Most UK brokers “can’t scale” Perez argues, because they don’t have the tech infrastructure in place to grow and that means retail investors are “missing out.”
The cost of these upgrades is going to be pushed onto consumers. “How do these companies make money,” Perez asks? The answer is via ancillary charges. Most pocket customer interest. Interactive pays clients up to 4.3 per cent on invested cash balances. Its main peers in the UK, Interactive Investor, Saxo, AJ Bell and Hargreaves Lansdown, pay between 2.4 per cent and 2.9 per cent in share dealing accounts.
Most customers are also “forced to hold sterling or pay high foreign exchange rates.” If a customer wants to trade US equities on Interactive’s platform, they will pay a 0.002 per cent conversion fee with a minimum of $2. The spot FX market rate is used for conversion. They can then hold US dollars. Hargreaves Lansdown charges a one per cent conversion fee under £5,000 on top of the basic dealing charge of £11.95 on both sides of the trade.
The cost of trading doesn’t get as much focus as it should do, the boss says. He notes that only nine per cent of trades in London go through the London Stock Exchange, the rest are executed off-exchange, either between brokers’ own customers or other channels, which is bad for transparency, and pricing. “Why is that,” he says? It’s “not good for the customer or for London.”
Not the cheapest, but the best
Perez is quick to note Interactive isn’t the cheapest trading platform on the market, but that’s not the point. The platform isn’t trying to be the cheapest, it’s trying to be the best – the most transparent and provide the best service for its customers.
Interactive hopes this proposition will resonate with customers. Perez says the company is targeting a “double figure” share of the ISA and SIPP market over the coming years, up from less than five per cent currently. “There’s huge potential to benefit from the shift from wealth-managed funds to self-invested funds,” he argues.
In Perez’s view, this shift is only just starting. He says he’s increasingly excited about the potential in the UK market despite the doom and gloom perpetuated in the financial press. The proportion of UK shares held by UK-resident individuals has fallen to around 10 per cent today, down from more than 50 per cent in the 1960s. Part of this shift is down to access and part is down to education.
Both are changing, the CEO says. Younger investors are increasingly sophisticated and want access to more markets and more flexible platforms. Many have gravitated towards platforms like Robinhood and Freetrade, which offer lower-cost trading. However, Perez is at pains to point out that, unlike the US, payment for order flow in the UK is “illegal” and there’s “no way around that.” That means trading can never be entirely free, and there’s always going to be a cost – often hidden – for customers.
Correction: The cash rates paid by the accounts offered by Interactive Investor, Saxo, AJ Bell and Hargreaves Lansdown have been updated.