Can Interactive Brokers Go Broke?

Can Interactive Brokers Go Broke?

Interactive Brokers is an American multinational company offering financial services. On their platform, the company has the highest daily average revenue trades in the country. With high volumes of financial transactions daily, can Interactive Brokers go broke?

Interactive Brokers does not hold any proprietary inventory, a leading cause of bankruptcy in financial institutions like Lehman Brothers and MF Global. They also do not make directional bets but are a facilitator for client trading.

In this article, I will explore the financial strength of Interactive Brokers, investor protection, account protection, and more. I will also address the hypothetical situation of what might happen if the financial institution were to go bust.

Let’s get started!

What kind of accounts do Interactive Brokers offer?

Interactive Brokers offer cash account and margin account for trading purposes. With a cash account, you can trade using cash while a margin account allows you to borrow money on an interest basis from Interactive Brokers for trading on the stock market. You would also need to pay either a fixed fee or a tiered fee depending on which system you opt-in to.

What kind of technical security do Interactive Brokers offer on these accounts?

With the risks of hackers on the rise, Interactive Brokers offer advanced and excellent security measures to all their clients. The company uses encryption on its servers to protect communications between the company and its clients. Users also have two-factor authentication that adds another layer of security to their accounts. 

How do Interactive Brokers manage the client’s assets?

The company brokers the following:

  • Stocks
  • Options
  • Futures
  • Bonds
  • Funds
  • And more

Generally, some of the client’s funds get invested in US Treasury securities. The transactions are conducted with third parties and guaranteed by the Fixed Income Clearing Corp. In doing so, Interactive Brokers can keep the collateral (US Treasury securities) in segregated accounts and special reserves.

The remaining funds are kept at various large US banks to diversify the risk if anything happens to a bank. These banks hold investment-grade ratings suggesting a low risk. To ensure further protection of the client’s assets, no more than 5% of the client’s fund gets invested in each bank.

Some of these banks include: 

  • Bank of the West
  • SunTrust Bank
  • Citizens Bank
  • Standard Chartered Bank
  • And more

The company also holds its own extra capital in reserves or segregated accounts to protect its clients during a financial crisis. 

Although money market funds are less risky, Interactive Brokers do not invest in these funds due to the credit concerns of the Commodity Futures Trading Commission or the CFTC over foreign sovereign debt.

Are there any regulations that Interactive Brokers follow to protect client’s money?

Yes, the SEC regulations require Interactive Brokers to reconcile their client’s money and the securities. It helps ensure that the client’s funds are kept separate from the company’s funds. SEC requires that the company conducts the reconciliation once a week.

What steps do Interactive Brokers take to ensure client protection?

Besides the SEC regulations, Interactive Brokers take client’s protection very seriously. The company approached the Financial Industry Regulatory Authority to approve reconciliation of the funds daily rather than weekly. It has been in effect since December 2011 and has been a positive step towards ensuring further protection of their client’s money.

The client’s securities get maintained in accounts at the depository. Interactive Brokers also conduct fully-paid securities reconciliation daily. It ensures whether or not securities have been received at the depository, further protecting their clients from any financial mishaps.

Are client’s accounts protected by the Securities Investor Protection Corporation?

Yes, like all brokerage accounts, client’s securities accounts at Interactive Brokers are protected by the Securities Investor Protection Corporation or the SIPC. This type of insurance protects consumers up to the value of $500,000 if the brokerage firm goes bust. It includes up to $250,000 in cash coverage. However, SIPC does not protect consumers from poor investment decisions. 

Can you lose money in a brokerage account?

Yes, you can lose money in a brokerage account if you make poor investment decisions. However, if anything happens to the interactive broker or any brokerage, your financial assets are protected by the SIPC.

Will Interactive Brokers go bankrupt?

Different financial indicators help understand if a company might go bankrupt. Interactive Brokers have equity of $9.9 billion, well over the SEC requirements. In 2020, Interactive Brokers reported pre-tax profits of $1.3 billion with no long-term debts. The financial services firm even has a BBB+ by Standard & Poor’s which is a positive sign. 

Having strong financials, compliance with SEC regulations, and relevant SOPs, Interactive Brokers are in good financial standing. It is unlikely that the company becomes bankrupt anytime soon unless in extraordinary situations like an economic collapse.

What happens if Interactive Brokers goes bust

Although this is an unlikely situation, if Interactive Brokers go bust, either of the two events may occur:

  1. Your holdings get liquidated with you getting your money back
  2. Another brokerage house purchases interactive broker in which case your holdings get transferred to the new broker

You also get coverage by the SIPC insurance. They will try to recover your account value in times of company failure. However, to get SIPC coverage, those affected by a brokerage failure must file for claims.

Conclusion: Should you open an account with Interactive Brokers?

From my experience, if you want to invest in the American stock market then Interactive Brokers is a cheaper option than brokerage houses. You can even trade foreign currencies and other financial instruments besides stock. I’ve also noticed that many brokers lend your shares to other investors by default but Interactive Brokers do not.

The main concern of many is whether or not Interactive Brokers will go bust like some before them. The company has strong financials, is well-regulated, and conducts daily reconciliations to ensure that there is no liquidity crisis at any time. Interactive Brokers is not likely to go broke any time soon. 

With so many policies and practices aimed at protecting investor’s money, even if they go bust due to an economic downturn, you will get your money back eventually.


Current recommendations:

Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:

P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!

1) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!

2) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).

3) If you are interested in crypto, check out Gemini. I've started allocating a small amount of assets to the growing crypto space and Gemini has just been a breeze to use. Once you register, make sure to also open an Active Trader account to buy crypto at the lowest fees on the market (just 0.03%!).

Latest posts by Marvin Allen (see all)

Leave a Reply