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Why 2018 Could Be Interactive Brokers Group's Best Year Yet

By Billy Duberstein - Updated Feb 20, 2018 at 10:10AM

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Strong customer growth, higher interest rates, and increased volatility could keep its winning streak going.

For Interactive Brokers Group (IBKR -1.08%), 2017 was a year to remember. The stock skyrocketed 63.6% in 2017, making it one of the better performers in the financial sector. But after such strong gains, what's in store for the company in 2018?

IBKR 1 Year Price Returns (Daily) Chart

IBKR One-Year Price Returns (Daily) data by YCharts.

The story behind 2017

There were a few reasons for the company's strong 2017. For one, Interactive Brokers Group exited its market-making business, which was actually the company's original business when it started up as a market maker for equity options back in 1977. The market-making business had become less profitable over the years due to industry and regulatory changes, and the company spent much of 2017 winding it down in an orderly way.

With that overhang now lifted, the company and investors have become more focused on the brokerage business, which was started in the 1990s and has since become the lowest-cost online brokerage in the industry.

Investors choose their brokers for a variety of reasons, such as proprietary research, ease of use, or customer service. However, cost and speed are perhaps most important (especially when the object of the trading business is to make as much money as possible), and Interactive Brokers' low-cost trades and margin loans have been attracting customers at a rapid clip. The company posted 25% growth in customer accounts in 2017, 14% growth in daily average revenue trades (DARTs), and a whopping 41% increase in margin loan balances. Those strong numbers happened even as competitors cut their prices in an online-broker price war. Still, even though Schwab and Fidelity cut their price to $4.95 per trade, both are still well above Interactive Brokers' fee of 0.5 cent (that's half a penny) per share per trade (with a $1 minimum).

a man grabs a white arrow in a field of grass  that goes up and to the right lifting the man off the ground  into the blue sky.

Interactive Brokers' low costs should lead to strong customer growth in 2018. Image source: Getty Images.

Last year also saw the company launch the Interactive Brokers Debit Mastercard, which allows customers to invest, borrow, and spend from a single account. In addition, the company was the first online broker to offer bitcoin (BTC-USD) futures trading, beating others to the punch in early December due to its technological prowess.

To cap off the great year, the company earned a top spot in the Investor's Business Daily Best Online Brokerages annual survey.

Why 2018 could bring even more

While Interactive Brokers posted strong marks last year, there's reason to believe things could get even better in 2018.

For one, 2017 was a record-low year for volatility in the market. You can actually bet on market volatility through something called the volatility index, or VIX. The VIX was incredibly subdued all through 2017, falling to an all-time low toward the end of the year. When there's low volatility, people don't trade as much, which explains the difference between Interactive Brokers' lower DART growth relative to its customer growth.

However, that picture changed a whole lot this month, as you can see:

^VIX Chart

^VIX data by YCharts

Higher volatility could lead to more trading activity and therefore more commissions for Interactive Brokers.

In addition, the higher volatility has come as stronger economic and wage growth has raised concerns about spikes in interest rates. That should also help boost Interactive Brokers' revenue from the large margin-loan balance increase last year. Interactive Brokers actually makes more in interest income than it does on trading commissions, so increased interest rates are no small matter. 

Finally, the cut in U.S. corporate income tax should boost Interactive Brokers' earnings by lowering its 35% federal corporate tax rate to just 21% going forward.

With solid performance in 2017 and several positive catalysts in the coming year, 2018 could very well be Interactive Brokers' best year yet.

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