Thursday, May 3, 2007

Interactive Brokers - IBKR

Sometimes you can just spot a blockbuster from early on in the process. I remember being exposed to Sacha Baron Cohen on television in 2002. From the moment I heard he was working on a Borat film, it was just clear that the film would be a genius work. In the film business you can't always trust the reaction of the public, so I wouldn't have gone so far as to say it would be a big money maker, until I experienced it - when that became crystal clear as well - Such as it is with IB, or Interactive Borkers as I affectionately refer to them.

A few months ago I finally got around to completing the process of doing an ACATS Transfer from a legacy TD Waterhouse account to Interactive Brokers. TD Ameritrade was an absolute disaster (to former Waterhouse clients) for nearly a week when they simply migrated the two trading platforms to a single-sign-on. On the ground, it was even worse than the media reported. I couldn't log on for days on end without jumping through a lot of hoops. A friend has long recommended getting a little redundancy and diversification among brokers. For a short seller, this is absolutely necessary. IB kept on popping up among other short traders for a high availability of lending shares, and I had a further thumbs up from another heavy trader I know and trust. So I made the leap, and moved about 1/3 of my capital to IB. It was by no means a seamless process.

Took very little time to get comfortable with their tools. The client-side of their platform shows a significant amount of software engineering. It just works, in cross-platform java, and it's well designed. Can't speak about the server side, but from what I can tell it may be even better. These guys have been an electronic brokerage for 30 years, and the electronic infrastructure is not tacked on -- It's their backbone. They provide an almost real-time margin borrowing calculator, which is how they keep their own risks in order. Their platform has open APIs to enter, access, and extract data.

When I heard they had filed for an IPO, my interest was already piqued. Was this a classic case of "buy what you know"? They did a decent job of notifying customers that shares were available, and providing access to the IPO process. But this was no Vonage (Nasdaq:VG) we're talking about. I read their S-1, and watched the roadshow video (bo-ring), and gathered information in places like

and here

Renaissance Capital's ipohome

and here

WR Hambrecht

Eventually even here

Technicator.NET - IBKR Risks and Returns

From my perspective this company could perhaps be the GOOG of the trading world, and Wall St. senses it. I make the GOOG comparison with great technical appreciation for the nuances of such an analogy. Renaissance Capital says it well, "In our opinion, Interactive should be viewed as a technology provider offering broker/market making services that give customers transparency into multiple global markets." And that's exactly right.

BB&B (Big Bank and Broker) had to queue up for this OpenIPO alongside J6P (Joe Six Pack). I've personally been aware of Hambrecht's OpenIPO process since went that route, and I had a ringside seat. I thought it was a novel idea in 1999. Since GOOG went that path, the markets have grown to accept the legitimacy of this OpenIPO process. It has it's kinks, but the way they've managed it, there is still plenty of room for after-market upside IMHO. For insiders, this is quite clearly the best route to go public, and you should need no better proof than the founders of GOOG and IBKR choosing this way.

IBKR is going to be a monster. All the jabber on the message boards of is one indicator. The retail traders of IPOs are trading this one up to $40. The underwriters are masterfully leaving plenty of demand unfilled, into a limited supply. When the IPO process started the underwriters were talking 20,000,000 shares offered in the float (with perhaps 400,000,000 outstanding on a fully converted Class B basis). They upped the offer from 20,000,000 in a range of $23 to $27 to 34,5000,000 in a range of $27 to $31. Another good indicator of demand when the share offering is upped in count and range. In the end, they put 40,000,000 shares out there at $30.01 for a market cap of $1.2 billion. The best final indicator of pent up demand when this hits the market is straight from the company Press Release of Thursday May 3, 9:01 pm ET.

The following is selected information about the auction:

- The auction clearing price was $33.00.
- The offering price was $30.01.
- A total of 13,504 bids were received in the auction.
- A total of 8,282 bids were successful.
- A total of 145,514,807 shares, in total, were bid for at prices equal to or in excess of the offering price.
- The pro rata fill rate for bids was 27.5%.

That says there were 100,000,000 shares bid at or above $30.00 which
were not filled. Or, demand at the $30 price was 2.5x supply.

This means that anyone who successfully bid much more than 100 shares got filled on an average of 27.5% of their order.

A lot of latent demand went unfilled. A fuck-load, to be more precise. This is going to be a monster when it opens. I wouldn't be surprised by a first day close above $50, though certainly looking for a close in the $40s. Not sure that's a sustainable valuation, but IPOs are all about the momo.

I bought some shares at the offer price in my Interactive Borker's account and in a retirement account through Fidelity. My bid was $33. This is a stock that I'm happy to place in a drawer and check up on quarterly. Perhaps I'll revisit at par ($100 share price). I have some problems with the A/B class structure, voting rights, and as Frank at Technicator puts it, "90%+ of the IPO’s $1 billion proceeds will go straight to the founder’s wallet". You'd like to see some of the offering money go to the company, but it's not a show-stopper. Speaking of stops, set at $30 in the unlikely event these shares ever go back under offering price. Seems like such a gimmee, but you never know. Refco seemed to be the same to some.

I know this trade does not strictly fall into the momentum fading category. Never one to pigeonhole myself, this doesn't bother me one bit. If you have a problem with it, just place it in the "getting in early" category of beating the momentum to the ball. I certainly won't be chasing in the aftermarket. You'd be more likely to find me shorting against the box come lock-up expiration.


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