Interactive Brokers (IEX: IBKR), in terms of their competitive positioning, has always been a cut above the mainstream retail brokerages. Their advantage in technology and automation (which results in significantly reduced costs) has been whittled away over the past decade by competition (indeed, commission-free trading has enabled most retail brokerages to rip off their customers on execution slippage yet give the appearance of cheapness), but they continue to find ways to experiment with new ways of finding new markets.
One is broaching the connection between sports betting and securities trading – there are characteristics in common with both branches.
A press release on July 1st announces that IB has a sports exchange where people can trade (imaginary money) futures on sport event outcomes.
“We expect this promotion to attract customers who may be new to the Interactive Brokers platform, and who are more familiar with spectator sports than they are with the financial markets,” said Thomas Peterffy, Chairman of Interactive Brokers.
“Our intention is to teach people about the probabilistic nature of markets, trading and investing. We are illustrating this by our Simulated Sports Betting Exchange where each winning bet pays 100. A player who assesses a team’s chances to win at, say 40% may want to buy a bet at less than 40 or sell it at more than 40. As more information emerges and as the event gets under way, these odds will change and the price of the bet will begin to fluctuate, similar to the price of a stock,” Peterffy said.
“By partaking in this promotion, our players will learn about our platform, how to trade and make investments and how to keep track of their finances, all while being entertained. We are betting that many of these participants will also try our free demo brokerage account and that eventually many will become Interactive Brokers’ clients,” he added.
People that are successful in the virtual sports betting will be able to receive an IB account with up to $1,000 in commission credits (first million people to do that). They are given a virtual account of USD$1,000 in currency, and if they accumulate USD$1,000 in virtual profits they can use that to offset commissions in a future IB account.
It is a fascinating promotion, to say the least. I’d expect nothing less from IB.
I don’t do sports betting but I can easily see the connection between the two.
That’s interesting. I’ll have to check it out.
But according to the press release, I’m not eligible for prizes:
Persons holding a brokerage account at Interactive Brokers at any time between January 1st and June 30, 2019 are not eligible to convert their winnings into commission credits.
“commission-free trading has enabled most retail brokerages to rip off their customers on execution slippage yet give the appearance of cheapness” – can you elaborate on this? Howe does this work? How does the brokerage firm benefit from this?
Google “payment for order flow”.
If you deal with large cap, highly liquid stocks you’re probably fine. But anytime you’re dealing with stocks that have spreads higher than a couple pennies, you’re going to get ripped off on execution.
From IBKR’s last conference call – transcript isn’t perfect but you get the idea – Thomas Peterffy is speculating whether they should get into the game of providing order execution to ‘dumb clients’ – and this should be taken as not an adjective of intelligence, but rather ‘dumb’ in a computational frame.
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Chris Allen
Kind of quick question. I am getting kind of bunch of questions on some of the Japanese brokerage commissions cuts to zero. And I’m wondering how do you think about whether there’s implications for your business. And I would imagine you have offsets there in terms of competitive pricing on around margin lending or FX. So any commentary that would be helpful, if you could?
Thomas Peterffy
So this zero commission business is a very interesting circumstance. So I assume you’re all familiar with the idea that some companies like Robinhood, and JPMorgan charge zero commissions and potentially others may, and they sell the order flow to high frequency traders, who give you a reasonable execution. It’s been you and us, some brokers that don’t have a choice because they do have the technology to route orders.
So, they just — they don’t have a choice, they have to sell it to high frequency traders who give them an execution because to build their routing technology it wouldn’t be enough to route to one exchange, you would have to route to multiple exchanges and you would have to have the software to distinguish within them and have decision-making software as to where to route at which moment and how much. So — but, you know, many of our customers especially are introducing brokers to us. You know what we really don’t care what execution prices you give to our customers. I mean it’s horrible to say but that’s what they tell us. So, at this point, we have to stop and wonder if we should maybe offer that service a seller group of dumb clients.