Automation lies at the heart of Interactive Brokers' prime brokerage model. Be it for risk management, account management, trade execution and pricing, everything is streamlined so as to provide fund managers with a cost-efficient solution.
Interactive Brokers can be viewed as a technology company that operates in the PB marketplace. At a time when bank-owned primes are overhauling their legacy IT systems to bring them into the 21st Century, the ability to remain nimble and technologically lean is working in the favour of non-banking primes like Interactive Brokers.
"We are constantly updating our systems for the future. I would say that is the biggest difference between us and the bigger bank-owned primes," says Steve Sanders (pictured), EVP, Marketing and Product Development, Interactive Brokers.
"We are a leader in pushing the trade lifecycle electronically. We are connected to a number of global electronic trading venues. I believe some 20 per cent of all bond trading today is now electronic and it's moving higher. One of the causes of that is regulation and the capital requirements that banks face; pushing the bond markets into the electronic realm reduces costs.
"We therefore think we are well placed to cope as the markets evolve. The days of calling brokers and trying to negotiate trade prices over the phone are over. We have a great bond offering, a great FX offering, futures and options, stocks; we cover all the major asset classes."
Historically, prime brokers went out of their way to support hedge funds of all shapes and sizes. They threw money and human resources at the business to stay in the game and consolidate market share; problem being, that was an expensive business model and one that no longer works.
"We have a low-cost model and in recent times this has worked in our favour. As the capital costs have increased to support this business, it no longer makes sense for the tier one primes to support smaller hedge funds," suggests Sanders.
To optimise trade execution, Interactive Brokers uses IB SmartRoutingSM, to seek out the best company stock, option and combination prices available at the time of initiating the order. By continuously tracking and evaluating market conditions, IB SmartRouting will re-route a client's order to ensure that the best price execution is achieved. For those wishing to protect block trade orders from signaling and information leakage to the lit market, SmartRouting is able to route institutional orders to eight different dark pools.
As market structure moves to full electronification under Mifid II, prime brokers will be required to offer this level of trade order sophistication for bonds and OTC derivatives as well as stocks.
"Costs come in three flavours: financing, commissions and price execution," says Sanders. "With respect to financing rates, they are fully transparent and listed by currency on our website. Once hedge funds get used to looking for alternative prime brokers like Interactive Brokers, and see that our costs are actually very competitive, they will wonder why they didn't consider us sooner."
Interactive Brokers has grown its prime brokerage business, such that roughly 50 per cent of trade flow now comes from institutional traders. The firm has over 2,000 funds on its books and as Sanders concludes: "We've automated everything and are, bluntly speaking, more cost-efficient. The last thing we're going to do is show clients the door!"
