Chit Chat Stocks - The Widest Moat Stock That No One Talks About

Episode Date: April 1, 2026

On this episode of Chit Chat Stocks, we dive into another Ryan Research episode, covering a stock with a wide moat and long runway to grow. We discuss: (00:00) Introduction (01:58) The Unique Advantages (16:05) Technological Superiority and Automation (25:38) Profitability and Business Strategy (30:25) Future Growth and Market Positioning (33:33) Competitive Advantages in Trading Platforms (41:02) Global Market Access and Its Value (46:27) Expansion Opportunities for Interactive Brokers (53:27) Understanding Valuation and Market Structure ***************************************************** Sign up for our stock research service, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Check out Value Spotlight: Stockwriteup.com  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is presented by Interactive Brokers. Interactive Brokers is the best platform for global investors. From their one-of-a-kind market coverage to their best-in-class pricing, IBKR truly has it all. If you're serious about investing, head on over to IBKR.com. Stay tuned for more Interactive Brokers later in this episode. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything

discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome into chit chat stocks a podcast to help you find your next great investment today we are diving into another ryan research episode i'm going to trade that trademark that ryan double r there we're covering a stock that i've been following for a long time but that deserves an update interactive brokers as a disclosure many you might know if you listen to the show that they have been a longtime sponsor of the podcast, but that has nothing to do with the investing thesis. I am also an owner of the stock as of this recording as another disclosure, and we will dive

into whether Ryan is going to add it to his portfolio as well. So if you hear an interactive broker's ad on this episode, which you probably will, I think actually you definitely will, I already know what ads they're going to be. Again, that has nothing to do with analyzing the business. Although we're users of the platform, we like them as a sponsor. And it kind of shows, you know, hey, you got to be pretty smart to want to advertise on a mid-level podcast like ourselves. But Ryan, I'm diverging from the actual topic today. We're going through Interactive Brokers. Maybe before we get into the history, what inspired you to want to do this episode for your monthly research i did a uh i do some company research for my job at fiscal

ai and i looked at interactive brokers and i was just more and more amazed as i dug in everything that's differentiated about interactive brokers under the hood because when you think about the brokerage space i feel like it's really easy to think it's hyper competitive because you've got Robinhood, you've got Schwab, you've got Fidelity, E-Trade, you know, the list goes on and on. But there are some very unique advantages. And I was I came away impressed by the moat that has been built around interactive brokers in what seems like such a hyper competitive space. Yeah, I think I had the same realization about a year ago. We also had, I believe, you know who we should get back on the podcast recurring guest louis sanchez he did an interview

on them i believe all the way back in 2022 stock has done quite well since then but let's dive into the history uh we'll have show notes and time stamps for anyone to skip around already knows the history of the business but it is quite fascinating founder thomas petterfee who i think that's how we pronounce it uh he is over 80 years old today and has had a wild life over the 20th 21st century. So Ryan, take us through the history and how Interactive Brokers got to where it is today. Yeah, to understand the history of Interactive Brokers, you have to look at the life of Thomas Petterfy. Thomas Petterfy is, I put here, probably the most successful entrepreneur you've never heard of, if you are unfamiliar with Interactive Brokers. He's an

81-year-old Hungarian-born founder who is now, I believe as of this recording, worth approximately 80 billion dollars and is widely considered the pioneer behind the shift to digital financial markets and his you should anyone that's interested in thomas petterfee i'm going to go through a bit of his life but you should read up on him it is truly an astounding like entrepreneurship story because i think he's one of the only people who's gone from true like at one point i think he was homeless to literally worth 80 billion dollars but let's go through his life he was born in socialist hungary in the middle of world war ii he says he was literally born during a bombing raid and petter fee in all the interviews he's done he he often talked about like instantly

not liking socialism like being frustrated with the lack of incentives to work hard there was not like any benefits to innovating and all this stuff and he could he says he could tell early on it wasn't for him and he wanted a way out he i believe his father had left apparently uh i i think we both read the same interview uh from colossus that they did with him uh his father was supposed to be like the minister of finance or something potentially like a really high up role and he was a bright guy uh but ended up fleeing the country anyways it's besides the He remembers being frustrated by socialism and he tells a story. He says one time when he was 12 years old, an American GI gave him a pack of juicy fruit gum. And this tells you what the conditions were like at the time. He cut every piece of juicy fruit gum into five separate pieces and started distributing them for money in the schoolyard, these little tiny pieces of juicy fruit gum. And he said he made a decent bit of money to him at the time anyways. And the principal called him in and asked him, where is your communist conscience? Why are you going around selling stuff in the schoolyard?

So anyways, in 1965, at the age of 21, Petter Fee was lucky enough to secure a short term visa to West Germany because he was, air quotes here, visiting distant relatives. Apparently, he had no interest in doing that. Immediately when he got to West Germany, he went to, I think, the U.S. Embassy or the Immigration Center and applied to immigrate. And once he was accepted, he bought a one way ticket to New York City. and he he recalls this time as being pretty difficult he says when he got to uh new york he had little money little to no money spoke zero english and he says new york was cold then and it's still cold like like the people personality wise are kind of cold is what he was saying anyways when he got there he was able to get a job as a draftsman for road maps at a highway engineering firm, and he was paid a whopping $65 per week. Apparently, he studied advanced geometry in technical school while he was in Hungary. So I guess it sounds like he had some transferable skills for this, but that was where he sort of found a knack for computers.

So there was a, and I did not know what this device was, but there was an Olivetti Programma 101, which was a programmable desktop calculator that would sit in the corner of this highway engineering firm and no one would use it. So he says he started using it to like automate calculations that everyone was doing by hand. And by the end of the year, every engineer at the firm, all his colleagues would come up to him and say, hey, can you run these calculations on the calculator? And that was sort of his first, I guess, experience working with technology, seeing the benefits of truly automating some tasks. Four years later, I'll skip through a little bit here four years later pederfy parlayed his computer knowledge into a job working for

and this was a little bit confusing but it was a psychiatrist named dr henry jarecki who had also built a commodities trading firm on wall street i think he'd stopped uh his work as a psychiatrist and started this firm and apparently this is actually pretty successful the the commodities trading firm was and within and he was an early hire for jarecki and apparently within a few years the commodities firm had grown a ton and pederfy being an early employee there his sort of importance grew and this was kind of his taking a step up from earning dirt poor wages and looking for places to stay to having sort of stability uh anyways the after they had gained success in commodities market, Petterfee was imploring his boss to expand into options, the options market,

because he thought there were a lot of mispricings. And he had actually developed his own sort of price option pricing model that it's contentious. But some people say Black Scholes was first. Some people say Thomas Petterfee's model predated that. I don't know. But just know that he was thinking on his own had built an options pricing model that he thought could derive different values for options and he could get some edge there so jarecki refused he didn't want anything he was like we're sticking with commodities options is this like risky operation we don't want anything to do with it so pederphy 1977 bought a seat on the american stock exchange not to be confused with the new york stock exchange for 36 000 i think this was a good

chunk of his his money at the time and began trading options on his own this was sort of the really where you could say the beginning of interactive brokers kind of actually begins so he would and at the time there was a lot of automation as well as much automation as you could get it was basically outlawed and a lot of these exchanges so he would do calculations on what he thought the options were worth based on his pricing model for various companies and he'd bring them in note sheets on like note cards to the trading floor and have the like the values ready to trade based on whatever was offered at the time this eventually evolved to him creating putting a computer on the back wall and he would have he had his office like next to the the

exchange he had a computer on the back wall he would have traders that would go to and from the computer you weren't allowed to have like a handheld device yet to and from the computer and check what the latest update was for the option value and then that was kind of the the second evolution if you will and then finally he created a and i find this impressive he created a handheld computer and there's pictures of this online if you look up like interactive brokers early handheld computers that would update the options pricing in real time or the options values apparently the exchanges outlawed this because uh or they created a bunch of rules around it like the computer wasn't allowed to have sharp corners because it might uh bump people in the

pit which is it's funny you've watched trading places it's it's it was crowded back in the day there was actual people down there did you know trading places was loosely based off uh like petrophy pet like he inspired the movie part of it really yeah yeah apparently um i read that maybe it was the culture or something no no it was like one of the characters he inspired the story because he was training these traders and he was basically saying like i think anyone can do it and he was actually hiring um he would hire these young men that wanted to get into finance and he'd have all the updated pricing on these automated handheld computers and no one would deal with them like nobody would exchange with them because the they actually

thought it was like unfair that they had this advantage so they wouldn't get any transactions so he actually hired like young attractive women is what he said and all of a sudden his his volume his trading volume started soaring a tale as old as time a tale as old as time you can say one thing about their entire him and interactive brokers and kind of the culture that's led to today is they're crafty to either get around rules or just use the technology or tools at their disposal to try to gain an edge yeah he was very much like a pioneer for digital markets like a lot of this stuff like you said he was either violating rules or uh cutting corners potentially on what the rules might be um but yes trying to get around to basically create whatever edge he could and

eventually this operation this options purchasing real time like lowest latency basically creating a market maker eventually was so successful that he put a name on it this was he named it timber hill and timber hill did go on to become one of i think pretty much the leading market maker uh for options so he had built this very successful operation that was largely built on information latency advantage like he had real-time prices he had quicker updating models and he was able to trade on that and basically build this small edge that built over hundreds and hundreds of transaction could get him a whole bunch of alpha and he decided i guess he says at this time that was sort of early 1990s they were a leader in the industry there was starting to be more

competition but he says he was at a crossroads he was coming to the realization that that same technological moat that were that was creating this massive profit platform he thought could be turned into a product for the very people he was trading against. Thus, Interactive Brokers was born. And I think that was 1993. So he opened the gates to his electronic network with the launch of Interactive Brokers. I'll pause there. Any thoughts on the history? Well, for anyone that is going to do a correct us, $65 a week is not that terrible. I wouldn't call it dirt poor. It's 650 a week in today's dollars so you know on the low end but not manhattan that's tough that's tough yeah i'm just saying he wasn't homeless most likely well he says at one point he one point

after that job he had uh i can't remember but in this interview he basically says he had no home at the time he needed a job had no home uh was staying with people and then ultimately obviously 15 years later had built the largest market maker i think on wall street maybe yeah and that is actually another early kind of addition of what has evolved into some of the bigger players citadel uh what are the other ones virtue for two financial some of the ones that they kind actually seeded the entire business to and focused on interactive brokers. But we're going to get into, I mean, this is still the 90s. They started with more professional individual traders as well as professional funds. They're trying to find a niche within this market that people want this

type of product. But as people are going to see throughout this episode that I've gone to today, they actually serve now really essentially from, if you want to be a Robinhood type small time trader they have the products for that so maybe go through what the product has evolved to now who they serve and kind of what you thought about their business strategy and you have it here automate everything kind of their technological superiority that allows them to have spoiler alert last quarter 80 profit margins yeah i think he actually has written a book or there's a book written about this called Automate This, about sort of the Thomas Pederphy Interactive Brokers story. But this isn't meant to just be purely business history, because we're going to talk

about why we think it's a good business today. But I think the foundations for how the business was set up actually kind of give a better understanding for why Interactive Brokers is differentiated now. So Interactive Brokers has spent the last three decades, call it 23 years, no, sorry, 33 years, iterating and building digital infrastructure that's designed to serve, at least in those early days, specifically sophisticated or advanced traders. Side note, the word automate shows up 73 times in the Interactive Brokers annual report. Good old Control-F. That's one of the underrated tools for research. Yes. But importantly, as Interactive Brokers was building this business out,

pederfy was apparently fixated on automation he knew that they needed to build systems that scaled really well and that's what they've now done for three decades so and i know you might say well every every company talks about how they want to automate systems and make it scalable and all this stuff how's that special i'm going to go through a few examples of systems that are critical to ibkr that they've done a very good job automating so the first one is order routing This gets really more sort of the plumbing behind financial markets, but it's super important because it's a big differentiator for them. IBKR has smart routing, their proprietary smart routing technology. They put like a trademark on it in all their disclosures on the website. And it's unique because it functions as a multi-venue dynamic search engine for your trade. So where most brokers send your order to a single market maker and think like Robinhood's a good example of this, they'll send it to a single market maker. They'll have a good deal with that market maker.

They'll earn a good spread, a bigger fee because they've got that like exclusive deal. That is going to create a bigger pricing gap essentially between the market maker and your quoted price. So IBKR, instead of having just that one agreement, they scan all available markets and dynamically reroute parts of an order if a better price appears elsewhere while the order is still working. So if you've ever placed a trade on IBKR and actually ended up buying shares for lower than your limit price, lower than you were expecting, and I know, Brett, you and I have both had this experience, this is why. They've got really sharp, smart routing technology. They're not cutting corners and taking bigger spreads just to do it. they are giving you the lowest price possible which is very helpful especially for advanced traders sophisticated traders investors that are moving big orders yeah and this is not for

ibk or light uh so if you're using that i'd still almost always use limit orders and i'd recommend in general just use limit orders whenever you're buying or selling stocks but yes i found that But unlike some other places out there that I've experienced with, they will, it's, you don't feel like, hey, did they actually take advantage of me on this trade? If I made a little mistake here, they're not going to try to catch you off guard if you put in a bad order. If you're a regular listener to Chit Chat Stocks, then you've probably heard us talk about interactive brokers.

Here are three reasons why we think interactive brokers is better than any other brokerage platform. Number one, they've got it all. Stocks, bonds, ETFs, options, crypto, you name it, 170 markets, 36 countries, 28 currencies. Number two, they've got best-in-class pricing. They have zero commissions on U.S.-listed stocks and ETFs and offer margin rates up to 54% lower than the industry. Number three, you can ditch the separate high-yield cash account. Interactive Brokers offers up to 3.14% interest on instantly available cash held in your investment account.

head on over to ibkr.com rate subject to change margin involves risk restrictions apply interactive brokers is a member of sipc no exactly they they are genuinely customer centric it seems the second sort of area of automation that's worth calling out is the margin loans and call process so when you apply and receive a margin loan the entire process is automatic but importantly the liquidation and evaluation process is automated as well so they've built a system that constantly evaluates every account's risk and margin requirements throughout the trading day if an account is getting close to falling below required maintenance margin they provide a color-coded cushion indicator to warn them so it'll be like red orange yellow basically like

you're getting close i've never gotten this so you know maybe one day uh then if you fall below your required margin amounts, the system automatically liquidates positions in real time to bring the account back into compliance. This is a process that like margin calls generally across most brokers is a fairly manual process. There's someone that's actually evaluating it. So this is an area of automation that's a big differentiator. A couple other ones I'll go through real quick. And if you go to the 10K, you'll see basically every product or feature that they have is automated in some way. So excess fund sweeps, IBKR can automatically move cash between different account segments for you. So securities versus commodities,

for example, to satisfy margin requirements. And then the fourth one is the stock yield enhancement program. Brett, I know you've taken advantage of this before. This system automatically manages the lending of your fully paid shares by identifying hard to borrow stocks in your portfolio that are in high demand by short sellers so it'll automatically handle the loan logistics provide collateral and split the earned interest with you 50 50 yeah if you're if you're a buy and hold person it's free money essentially if you're not someone that is worried about having to sell the positions anytime soon i mean take advantage of that yeah absolutely so So Brett mentioned it, basically nearly 80% operating margins.

How are they so profitable? And Brett, maybe you can share some of the charts here that we've got. But A, these businesses in general are structurally pretty asset-light, like brokers, digital brokers specifically. You're going to have generally high margins for any big broker of scale. But they are above and beyond all their competitors. So if you look at interactive brokers operating margins versus Charles Schwab versus Robin Hood versus Coinbase, Coinbase, obviously different securities or tokens, whatever you want to call it, traded on the platform. but the business model economics should be similar they are above all of them they've got 77 operating margins schwab has 48 robin hood 47 coinbase 20 and those businesses actually have more customers schwab robin hood coinbase i don't know but schwab and robin hood both have more

transacting users or customers uh than ibkr but i'd care i believe ramen hood has much lower total aum if you want to call it that i think maybe maybe let me confirm that you you've looked this up ryan i believe the account values are significantly larger on interactive brokers yeah so that's probably maybe plays a part into it but it's a great it's a great point they have like, okay, you can say all day, any company can say, we're efficient. We're going to automate everything. We have 50 years of building these connections around the globe with financial markets. And we run lean. We only have a really good tech team that's going to make things very simple for our clients, but we're going to be able to run with only a couple thousand employees

compared to our competitors. But IBKR shows this in their margins, which they've, as they've scaled up here, seen tremendous operating leverage. Let me note just things that I like to see them do as a customer, or sorry, as an investor. For example, a lot of these things, eventually a Schwab, if they got their act together, could catch up over time. But if you look at this recent press release from just a few days ago, Interactive Brokers said that they are enabling crypto portfolio transfers without having to sell and then rebuy once you open up an IBKR account.

And they have the lowest cost in the industry, maybe not by far, but they claim to have the lowest cost for professional traders. So for anyone that wants to consolidate under one platform, you can do so tax-free by doing kind of an account transfer

over your crypto holdings to IBKR. And then they have the lowest cost for pros. So it is that value proposition. that keeps growing and growing and growing yeah and let me kind of put some numbers on this so i guess a couple things that makes them so much more profitable so much more profitable than those competitors one focus so interactive brokers is they are they're exclusively a digital broker that that is their focus as a business you compare that to like schwab or fidelity those are more full service models with like wealth management services which is fine maybe you can earn more

dollars per customer potentially on that but structurally your margins are going to be lower because you employ more people you have more costs uh to give exact figures interactive brokers has 3 182 employees i believe have the uh on the last 10k that comes out to more than two million in revenue per employee. Schwab, for reference, has more than 33,000 employees or basically a third of the revenue per employee that Interactive Brokers has. The other one, and this is big and you've kind of alluded to it, is the direct access to exchanges. So this is perhaps the biggest differentiator. Most online brokers like Robinhood, for example, actually act as intermediaries that route customer orders to third-party market makers we've talked about this uh or centralized

trading desks and rely on specialized clearing firms to handle the back office settlement for trades interactive brokers has chosen to build a direct approach by purchasing memberships literally remember what uh thomas petterfee did in in the old days paid 36 000 to be a part of the american stock exchange similar uh so they purchase memberships on hundreds of individual exchanges in 40 different countries around the world. And then they're able to manage the process themselves. So now they offer access to 170 markets. I think Schwab for context has like 33 total markets. And although this is more costly upfront, they're paying less in variable fees associated with each individual transaction, which helps benefit IBKR at scale. And then the third

one and this is it's one of those things where you think like is that really a sustainable advantage but they have had a general cost consciousness or sort of culture of frugality basically since the early days and i'll give two clear examples of this in 2007 when interactive brokers went public instead of paying the major fees that are required to go public through these bulge bracket investment banks he chose a dutch auction approach which is apparently a more i guess democratic uh system and hired an obscure firm to list 10 of his business that apparently saved him 80 million dollars in the process the second one here we're going to talk about this advertising for a long time they spent literally nothing on advertising maybe they sponsored some

events or something i don't know but there's no line item in their income statement because there wouldn't be much to report now they are starting to press the accelerator on this a little bit although obviously still well less than one percent of revenue when you think about that compared to like a robin hood for example so they're spending nothing on advertising largely because throughout their history they've been the de facto platform for sophisticated or advanced traders and they didn't really need to the product kind of spoke for itself especially for that demographic now they can kind of press the accelerator so to speak one thing i'll add there is that they are moving towards individual traders and trying to compete more directly with

robin hood for example they're going after people like us and they're going after listeners of our show this isn't a show that you know we like to think that we we're not the super basic investing but we're definitely not tailored to sophisticated hedge funds or what have you. It's buy and hold, you know, Motley Fool style, Warren Buffett style, Peter Lynch style, and they're advertising more towards that. Yeah, they're dipping their toe in the water by becoming an advertiser on a show like ours. But what's interesting is that in there was a article on a profile of petrophy on Colossus, the magazine Colossus, I believe it's called. If you look at up thomas better if he closes it'll pop up on your google search results he said he specifically

focused on marketing right now that's the next project he wants to solve and that he thinks that they can just keep scaling that as they find good roi which makes me comfortable as one of their advertisers i think we do a fantastic job for them obviously but they only have as maybe but we can share the chart here. Did you mention they only have 4 million active accounts versus hundreds of millions of a potential addressable market? Robinhood, Schwab, active accounts, Fidelity, what have you, and people have multiple brokerages out there.

They are well, well behind the competition. And you can kind of see the inflection point coming out of the pandemic where more people started stock trading as well as when they started marketing. So I think there should be a long runway to grow. So do you look at it any different, Ryan? No, I agree. I'm just pulling up the numbers here.

And this is sort of a chance for us to plug Fiscal.ai as well. The total accounts has, it looks incredible, like just on a chart. They've gone from, I think, around 200 million total accounts in 2012 to 4.4 million, or sorry, 200,000 to 4.4 million today. So 20X their customer base over 13 years. Yet, like you said, it's seen a massive acceleration over the last five years specifically. they there is hundreds of millions of accounts out there globally that they can go after and i think they've now really positioned themselves well to see a big acceleration in this uh specifically total accounts now they're not going to be all sophisticated hedge funds kind

of thing but you're going to have a lot more retail accounts now which still very beneficial to the business and there's virtually no increased variable costs to including more and more retail traders as well and maybe i should mention their fiscal ai is where we got that total accounts figure if you use our link in the uh show notes fiscal.ai slash chit chat it'll get you 15 off any paid plan something you mentioned brett that i want to go back to the like companies can replicate in theory they can replicate some of these models right think about like the smart order routing for example or whatever like instead of selling to just one market maker them going for the best execution what you know why couldn't schwab do that there's

nothing technically like prohibiting them from doing it but a lot of them are unwilling to because they're going to sacrifice a big profit pool for themselves and these aren't owner operators like schwab doesn't you know part of it's because they've been around for a century they're not run by a founder so there isn't huge insider ownership where you're willing to sacrifice short-term profits in lieu of long-term benefits we saw this specifically during the silicon valley banking crisis the the interactive brokers is now in a position where they have built these advantages that aren't necessarily impossible to replicate but competitors aren't willing to replicate i agree yeah yeah that's a fair point it's

it's not it's sort of the innovators dilemma but it's almost well we're going to go for the lowest cost product at, yeah, a lot of companies have gone commission free trading, but the advent of high frequency trading and selling order flow has made that a little bit different where now it's about getting you the best pricing, not necessarily from a fee standpoint, but from actually, okay, what are you going to buy at lowest or sell at the highest price when you send in that order? That's what they're optimizing for. I think before you get into their competitive advantage the last thing i'll mention is that people listeners to our show especially you know we're an english speaking podcast we're from the united states over half our audience is from the

united states but interactive brokers is actually much more global than many listeners might think because the value of a platform that can go global is much better if you live in a place like i always use the example i don't know why but columbia uh that one if you can get access to the united States market is much more valuable than the United States person getting access to a market in South America. And that's true for the hundreds of different countries around the world that interactive brokers, you can get an accountant. Not everyone in these countries is going to want to invest, but for the people that do, IBKR is the go-to solution. And there's likely not even nearly as the level of competition as in the United States. So again, the total addressable

market for active accounts i think is much bigger than maybe some people think yeah that's a really good point and it's when i think of market coverage like we advertise how much great market coverage they have for u.s investors that's kind of typically who we're speaking to when we say it but it's way more beneficial for the international investors like if you are you know in japan having all these securities traded right there and being able to access the u.s markets and all these other global markets that's way more of a uh i guess upsell than okay i'm a u.s investor and they just added their 171st market it's much it's much more valuable to the 171st market and the traders in that region than it is to the u.s based uh accounts why do i call this the widest

that no one talks about so that is something i well i guess we haven't decided whether we're putting that in the title or not but i that's something i i think is true when you talk about moats not you but when investors talk about moats there's a lot of common companies that come up visa and these companies deserve it visa moody's costco amazon taiwan semiconductor maybe asml No one really mentions interactive brokers. And I think a big reason for that is because it's really competitive on the surface. But when you go under the hood and look for specifically for advanced traders, and now it's obviously graduating to traders all around the world and not even traders, investors, there are some things they do that are really, really difficult to replicate. Here are three things that I think give them a massive moat. The first one is this is a prime example of scale economy shared. That is the the old Nick Sleep principle. So I'll give a quote. scale of scale economics shared operations are quite different as the firm grows in size scale savings are given back to the customer in the form of lower prices the customer then

reciprocates by purchasing more goods which provides greater scale for the retailer who passes on the new savings as well yippee this is why firms such as costco enjoy sales per foot of retailing space four times greater than the run-of-the-mill supermarkets scale economic shared incentivizes customer reciprocation and customer reciprocation is a super factor in business performance obviously this isn't a retailer so the analogy isn't exactly apples to apples but ibkr we just talked about all the things they do to basically be the low-cost provider the automation the general cost consciousness the scale at this point where they can keep their prices relatively low they could just harvest those excess profits and keep them to themselves

which this is wild to be saying for a company that has 80 profit margins but they actually return that cost advantage to their customers in a number of ways first one when customers hold cash in their investment accounts ibkr pays up to a 3.14 annual interest on those balances at the moment I should say interest rates can change. Whereas most brokers pay nothing. If you want to earn a little interest and maybe brokers pay a little bit, but I think most of them pay nothing. If you want to earn interest, you've got to put that cash into some short-term yielding asset. Interactive brokers takes it one step ahead and does that for you. The other one, and this is probably the single biggest selling point for a lot of customers is they offer the lowest margin rates i think of

anyone in the industry so the quote they have is ibkr's margin rates are up to 53 percent lower than the industry on average and i i remember i posted a chart that was like interactive brokers accounts versus account growth versus schwab i was like why is this happening and everyone's like well they offer the lowest margin rates i think it's a big selling point for a lot of people not really how i invest but nevertheless i this type of competitive advantage this type of moat is probably one of my favorites where they have they're the low cost provider and then they reinvest the savings to benefit customers now maybe they could reinvest some of those savings into customer support i've heard that's a big knock from a lot of customers but they're clearly

giving back through the form of lower margin rates and higher interest on cash so that that to me is when it it becomes really hard for new players to catch up to the leaders is when they are using sort of the scale economy shared philosophy i'll stop there any thoughts yeah it's a balance between the customer support which maybe they'll automate with ai better but if they can help them save on cost. As an investor, I have no problem with it as long as they're able to keep adding active accounts and posting those margin rates. It doesn't look like anyone's too upset to want to leave the platform yet. Yeah, I got nothing to add. I think that really covers the scaled economy shared and part of the competitive advantage. What else do you have for this widest business

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moving. Or go with the flow and choose Ginseng Delight, our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on nespresso.com the second sort of pillar and we've already talked about this a bit is the whole global markets thing so they offer more markets more geographies than i think any other mainstream broker like maybe you can get better market coverage from your prime investment bank broker who's going to do it manually and charge you a bunch. But in terms of mainstream brokers, they are the widest coverage. What does this actually mean? Because I kind of thought, like, well, why doesn't Schwab just do this? Like, why don't they just buy a bunch of different

markets and give access? Adding a new country is not as simple as flipping a switch. Apparently, it's a multi-year, often negotiation that involves a bunch of major hurdles. So one, there's regulatory licensing. Brokers have to acquire the appropriate regulatory licensing for each individual market. That means hitting certain capital requirements. It means specific reporting standards. The second part is the technical integration. Every exchange uses different languages or protocols for their data feeds and order routing. That means engineers have to build custom bridges to the exchange's APIs to ensure that when you click buy, the order travels halfway around the world in milliseconds. The third one, clearing and custody. When you buy

a stock, someone has to hold it. So to solve this, IBKR either becomes a member of a local clearinghouse or sets up a relationship with a custodian bank in that country to hold the digital certificates of stocks. Ultimately, this is sort of the complexity and boredom that a lot of other brokers simply aren't willing to go through. So they don't want the legal headache of filing tax paperwork in 30 different languages or the risk of holding assets in volatile emerging markets. IBKR for the last 30 years has embraced this complexity because once they build that quote unquote pipe or that new market, it costs them almost nothing to let more users trade through it so again high fixed cost to get set up in certain markets but you you reap the benefits

as you scale in both in those markets and having other traders place transactions in those markets yeah it's a good point it's not that valuable for someone again we use the mainline brokers vanguard fidelity schwab if you're just you're you just want people to put their assets there on your platform, buy ETFs, just buy QQQ and SPY and your index funds and do your wealth management services that are just going to track the market. Why do you want access to direct access to Japan? But for interactive brokers, they see that as a value proposition for their core customer and something that they can convince someone like Ryan and I to switch over to their platform if you get frustrated by not having access to international markets.

the last one i'll mention is execution we already talked about it so i won't go too long but i think there's sort of a misnomer around commission free trading and some people might already know sort of the payment for order flow process but for a while i think there was a there was sort of a knock on ibkr that well they're still charging commissions for trades in a world where ibkr or robin hood's giving them away for free as you learn more about payment for order flow and i think as as traders be traders or investors or people kind of become more privy to what's going on behind the scenes with payment for order flow they actually tend to appreciate fixed commissions so for example on if let's say you had a bigger account and you placed a

fifty thousand dollar trade that commission that the hidden costs in the payment for order flow could be 100 250 dollars somewhere in there as opposed to the six dollars or whatever you'd pay in the fixed commission so the no commission can be nice for smaller accounts that are growing but ibkr actually offers both you can have ibkr light which is commission free or you can have ibkr pro which is fixed commission. And they said most people actually still prefer to have the fixed commission. Now, maybe that'll shift a little bit over time as they get more sort of retail or individual investors as opposed to the funds that they sort of built with over the last 30 years. But I think it's an important distinction. And they really go through the fact that they

offer both i think shows you the transparency that we're going to give you the best option whatever is best for you as opposed to hiding anything like some of these other brokers do yeah it's a fair point yeah it's i think it's it's more of the focus on the customer that is what at the end of the day is going to lead more people there and just given their better overhead cost management they're going to generate a lot of profits and if you focus on that i think the best businesses generally are the ones that went out over the long term because they treat their customers right and that's going to lead to good shareholder performance or performance for shareholders okay let's talk new expansion opportunities i want to give a quick shout

out to you brett these were i didn't really think about these until i read your write-up on interactive brokers which for anyone that hasn't checked it out he has a good write-up on the emerging most newsletter that was i think in january february yeah and i actually relied on a lot of the research for this episode but there's a few tailwinds that i think will be big expansion opportunities for interactive brokers the first one forecast contracts prediction markets sort of the same thing this is another way for them to drive transactions and i know when i said prediction markets some people maybe roll their eyes or groan because they picture like degenerates betting on the weather for the day but it this is a way if you have a

differentiated view on a stock let's say or an upcoming earnings report this is a way to express that view especially for certain funds and i know this feels a little unfair to the individual trader but let's say there's like a kpi for example that a fund tracks really well and maybe they and some funds do this by the way they put satellites up they know inventory for certain places they know uh whatever volume for certain locations that kind of thing they could in theory uh have sort of an informational advantage there and bet on specific contracts like that uh through sort of these forecast contracts there's a lot of other ones as well like you can do whatever will the s&p 500 be above a certain amount by the end of the year or the quarter

whatever ultimately this will just i think drive higher transaction volume and i actually believe it will help attract new customers as well that are maybe averse to the like more gambling focused prediction marketplaces that are like it's okay right it's gambling there's just another way for them to make money they want any asset on the platform i think that's it they want any whatever asset you can trade legally they want it on the platform to be clear there is not sports betting on the interactive broker one that's fair that's not an asset though that's true you know yeah i think there i think there may be waiting and yes sports is a bit different but maybe they're waiting for the legal stuff to play out because there's still a lot of to be determined within

that market yeah and it's actually been uh fun to kind of watch this evolve because when they first launched forecast contracts there was a lot of limits like there was only so many forecast contracts on there now if you go visit it way more volume so way more people betting on these contracts and way more contracts themselves the second one i think this is maybe my favorite one 24 7 trading it feels this has been discussed for maybe like a decade now i think it's more and more likely that it's going to happen and by the way i will say i'm all for this i don't know why people have gripes with 24-7 trading yeah unless you're someone that's glued to your screen if you just check your account once a day there's nothing wrong with that but does it need to be open

for that long probably not it's better for interactive brokers though unless i'm wrong there's no like this is kind of an antiquated system to have it nine to five or nine to four whatever yeah i think there's no reason it can't be open 24 7 i think people just think of like not more maybe not morally but they just see that it just could have some downstream side effects that are negative if it causes people to be addicted to this like with crypto but that doesn't mean it shouldn't be available you just gotta be disciplined as someone who doesn't check their portfolio that regularly it's really annoying when i miss the time cut off to like add shares in a day i'm like you're kidding me whatever i'm a once a day guy once a day guy

yeah he's gonna do once a day anyway i mean i don't see any downside for uh to ibk for 24 7 trading just means more transaction volume means more revenue for interactive brokers and then we already talked about this but the third one for me expansion opportunities is a global expansion So adding more markets, they've got a few, I believe, slated for 2026. And I know if you're in the U.S., you think, what's the big deal? Okay, now they've got 171 markets. Great. Now I can look at stocks in the Philippines. But for the Philippine investors, it's a huge deal and it helps with account growth for interactive brokers. And then the last one I'll say here, we've kind of alluded to it. And this isn't like an expansion opportunity, I guess, but they have done a really good job. So historically, they've been really positioned or geared towards funds and professionals. And that's the market that they've basically won. But now I think they've done a great job taking that world-class digital infrastructure, smart routing technology, and positioning their product for individual investors as well with IBKR Lite, IBKR Desktop. I think that's the naming where it's web-based as opposed to the application itself. Crypto products, mobile app, they're doing a better job being an app that's accessible to someone graduating from Robin Hood who doesn't want a full-blown terminal. Would you agree with that? yeah that's fair they launched idk idk our light in 2019 uh it was in reaction to everyone going

commission free it's probably a smart move and i think it's working well but there's no reason anyone that uses ramen hood these days unless you have that full financial services aspect and the not not the wealth management but the credit card stuff and all of that there's no reason someone would go to interactive brokers now and go, hey, I'm missing something that was on Robinhood. Whereas if you go the other way around. Unless you're a sports better. Yeah.

Do they have that on Robinhood now? They have a Cal Shearer polymarket partnership. Yeah. Well, they'll lose that customer. It's OK. I'm not sure they're that profitable. No, probably not. Let's talk valuation.

I think this is part of the probably the most actionable part of the discussion today. So important thing to understand here, IBKR has a bit of a complicated ownership structure. There's an IBG Holdings where Pederfy and I guess some other people hold a Class B common stock that is not available to minority shareholders. And that grants them, I think, basically 75 percent of all the voting power. The important thing here is a lot of the aggregators have the data incorrect. The market cap that you as investors are really looking for is going to be the implied market cap. So it's going to be the class B plus the class A. So to illustrate this point, the consolidated net income for interactive brokers last year was $4.4 billion.

dollars net income attributable to common shareholders was 984 million dollars so you want to use the implied market cap plus or and divide it by the consolidated figures i'll go through some of the numbers but i know i know that's complicated if you go to the 10k there's a diagram that shows the ownership structure the important thing to understand here is it's petterfee's company he owns it he's got all the voting power and just make sure you get your market cap right but don't worry yeah petrophy controls everything but at the end of the day it comes down to you trust the company and the executive team so just don't get fooled and thinking the market cap is much lower than it actually is yeah yes double check those figures

so anyways implied market cap is currently 108 billion dollars they generated 4.8 billion in operating income over the last 12 months so face multiples market cap to operating income 22 times i'm now going to read a snippet from brett's recent write-up he says if you take a longer view any confidence in sustained account growth at current levels could make ibkr a buy today 30 account growth for the next five years remember pederfy is promising this as long as he's still alive a sidebar here in the last conference call they asked this is really good account growth how long do you think this last this can last and pederfy said uh uh as long as i live so he's he's confident that he can continue to grow accounts and he is a over 80 so it's not like uh it's

gonna happen for decades yeah 10 10 more years maybe 10 more good years yeah hopefully uh continuing on with brett's quote this 30 growth over the next five years would lead to 16 million in total accounts five years from now honestly i do not think this is an overly bullish expectation given the addressable market is in the hundreds of millions that would be 3.7 times the current customer count sprinkle on some inflation and per user transaction growth and revenue could scale five times over the next five years in a bullish scenario he also says i don't think this would happen in a prolonged bear market we can talk about that in a second a stable pre-tax profit margin would yield $24 billion in annual operating earnings five years from now. As I write this,

it feels overly bullish, but I don't think it is impossible. I agree. I totally agree with it. To me, it feels crazy to say, but I don't think going from $4.8 billion in operating income to $24 billion in operating income in five years is entirely out of the question. I do agree that saying it out loud makes it sounds feels optimistic hey 2020 1.23 billion 2015 460 million and 2025 4.8 billion so it the trajectory isn't off but yes 2020 to 2025 has been a great wouldn't you say coming out of the pandemic outside of the 2022 period it's been very nice time for equity trading financial assets yeah and i think they have done a really good job we talked about this positioning themselves for individual

investors as opposed to being a too intimidating of a platform too complex of a platform which maybe people thought it was 10 years ago that doesn't seem to be the case anymore and actually if you look at some of the, I'm sure they talk about this as well, but if you look at like transactions per account, it's basically been cut in half over the last 10 years. So that tells me that, and I'm sure you could find like deposits per account as well, but it tells me that they're skewing more and more towards individual investors as this account growth is starting to just balloon. So I think they're in the early stages of their growth curve. I think they've got a cost advantage i think they are pressing that advantage now with focusing on marketing and going and

getting at new customers i am and i'm comfortable i am comfortable with the valuation so i plan to add more shares uh i will wait until we have our little uh our clearance period were you were you already a shareholder coming into this recording yeah it was a tracker position ah yeah i mean i think it's like over five percent of my portfolio it's one where i think like they're not going to blow up during a market downturn so the stock tends to be very pro cyclical to how the the broad market performs so if we get a bear market that's where i feel like the opportunity to double down is you're not going to take out new lows maybe not uh compared to the april 2025 period or the especially now the 2022 period but you know that's maybe where the buying opportunities might

lie and it's one for me that i would like to make one of my largest positions in a bear market today you know it's a decent sized position but again we're at a pe of 30 so it's not something i want to go hey this is and it could be elevated earnings if we go into an extended bear market so i want to keep it balanced at least that's how i look at it maybe you look at it differently no this is the kind of i don't want to miss the opportunity to own interactive brokers when i think there's a realistic possibility to go from 5 billion to 25 billion in operating income but this could get earnings could get cut in a bear market and i would be much more excited to add shares in a bear market the last thing i'll mention here if you go to fiscal ai and you look

up uh interest income for interactive brokers versus schwab uh over the last like four years three years four years this is a very good showcase of the benefits of having an owner operator at the helm and keep in mind schwab people were saying it might go under three years ago i think people forgot about this but interactive brokers they were very patient with so basically with cash held they're able to invest it in various assets of brokers they can in the case of ibkr they i believe it was pretty much like one month or three month treasuries so super short-term assets schwab was getting impatient they weren't hitting their or they needed to reach for yield in order to meet some of their compensation hurdles

so management started getting into riskier assets longer dated assets they were doing mortgage-backed securities i think they had 15-year bonds trying to reach for yield to hit income thresholds when interest rates spiked all those assets were basically underwater they they are lucky that they don't have to mark to market them or mark them as down they can hold to maturity but they are obviously worth significantly less when interest rates go up so there is the chance that you have another 2022 like 2023 like scenario with schwab that just leads to a bunch of account growth for a platform like interactive brokers yeah uh nothing else to add on my end i think the main takeaway for me for valuation is that on a long-term time horizon

I feel like it's cheap. It looks like it's fairly cheap. Even though the P.E. ratio is 30 today, their potential to grow is outstanding. But there are risks with that. They may not get those numbers. And we are in, despite this recent correction, it's still a pretty aggressive bull market. Valuations are very stretched. So there could be better opportunities ahead. So you got to balance that as an investor, make your own decision with that. All right. I think that's going to do it. Thank you to everyone for tuning in. Brett, any other closing thoughts or are we going to wrap this up? as i say thank you to our sponsor interactive brokers i will reiterate that i the investment decisions and any sponsor we have is the only one that's really gonna until fiscally i goes public

and ryan gets rich uh that's the only one that's gonna have a you know any sort of conflict of interest there again we have them as a sponsor it's totally separate from any individual stock portfolio decisions we make uh yeah i think great episode let us know any other stocks that you want us to research on the podcast and as ryan mentioned i do have that uh paid research service emerging moats the link is in the show notes check it out you can read the ibk r1 and if you want a free trial i will give you that as well um anything else from you ryan or should i hit the disclosure when we can get out of here. No, I 100% recommend people utilize the free trial.

There's now, Brett's done this for, I think, almost six months now. There's a great back catalog of research on a lot of exciting companies, interactive brokers included. MercadoLibre coming Friday as well. Going to be a nice comprehensive research report there. Nice.

I think that's going to do it. I can hit the disclosure. Thank you everyone for tuning in. We want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Stocks is not formal advice. or a recommendation. We may buy, sell, or hold any of the securities discussed in this podcast,

so please do your own research. Thank you again. We will see you all next time. I finally had a light bulb moment about a stock we've all heard about, growing at 18% a year, and a 15 PE. I shared this insight in a special deep dive report to subscribers of my research service, Value Spotlight. The report is called A Generational Moment, Reigniting Human Connections Through a Tangible Network of Intangible Assets. Chit chat listeners can get a discount to my research at stockwriteup.com. That's stock, W-R-I-T-E-U-P.com. Audio ads that connect. Display ads that stand out. Run them together on Spotify and unlock incremental reach for your campaign.