Billionaire Thomas Peterffy Practically Invented Digital Trading. Now He Wants To Be Your Broker


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His 80-acre spread, with its 8,000-square-foot stone mansion, sits behind a gate and a guard, off a backcountry Connecticut road whose out-of-numerical-order addresses confound outsiders. Budapest-born billionaire Thomas Peterffy likes seclusion; for decades this pioneer of electronic trading happily kept out of the spotlight.

But then high-speed traders squeezed the profit out of Peterffy’s own computer-driven marketmaking operation. And so at an age when many entrepreneurs step back, he has thrown himself into building a marketing-intensive discount brokerage business and a new public persona as founder, CEO and 75% owner of Interactive Brokers, which accounts for most of his $9 billion net worth.

“In the old days I used to think about the models, the programs and the mathematics,” Peterffy says in his heavy Hungarian accent. “And now I’m completely consumed with marketing. It’s not a straightforward, logical thing.” He sits in an armchair in the guest house he uses as a home office, dressed in khaki slacks and a candy-stripe Oxford shirt. The room is paneled in rich African mahogany, with large bay windows opening on to fields where dairy cows once grazed. Yet Peterffy hardly seems relaxed. Instead, he is taking on the marketing challenge with the same intensity he earlier applied to mathematical models and technical hurdles.

He has even starred in ads for Interactive. In one, as Michael Lewis’ Flash Boys floats across the screen, Peterffy intones: “At Interactive Brokers we do not trade against your stock orders. … We build technology so you benefit from fragmented markets.”

Fragmented markets? It’s almost comical compared with fellow billionaire Charles Schwab’s breezy “Talk to Chuck” campaign. But Interactive’s target audience is a more specialized one: small hedge funds and trading groups, independent financial advisors and active individual traders who want a sophisticated platform and unusually broad product offerings–nearly 5 million equities, mutual funds, ETFs, options and futures from 24 countries. “In terms of simple access to exchange-based products they’re clearly the leader in the brokerage world,” says Gabelli & Co. analyst Macrae Sykes, who, despite Interactive’s third-quarter earnings miss, still recommends the stock. It now trades at $26, or 29 times forward earnings, the same P/E as Schwab.

By Peterffy’s figuring, only 5% of traders who should use Interactive have so far signed up. His face contorts, and he lets out something between a scream and a wail. “It drives me crazy,” he says. “I’m really frustrated that I can’t get this business going full sail as it should be.”

Peterffy has always been a full-sail kind of guy. Even in high school he was entrepreneurial, selling smuggled sticks of contraband Juicy Fruit gum at a 500% markup. He arrived in New York at 21, a penniless descendant of nobles who had lost nearly everything under Communist rule.

Trained as a surveyor, he got a job at an engineering firm and in 1966 found himself in front of a computer for the first time. His bosses had bought an Olivetti No. 1, but no one was able to program it. Peterffy volunteered. “I couldn’t speak any English, so I figured the computer language might be easier to learn,” he says.

A gifted programmer, he took his skills to Wall Street and began building trading models for others. In 1977, having saved $200,000, he plunked down $36,000 for a seat on the American Stock Exchange and used the rest to start trading as an individual marketmaker in equity options.

Back then trading was done by real people using an open-outcry system; computers weren’t even allowed on the Amex floor. But working at night Peterffy had developed his own algorithms (similar to the Black-Scholes model) to determine the best price to buy each particular option and then brought cheat sheets with him to the floor. By 1979 he had four traders, all working off his models.

Finally, in 1983, Peterffy won Amex’s permission to equip his employees with handheld devices using his computer programs. All the while he stacked his marketmaking firm, Timber Hill, with like-minded quants–folks like Thomas Frank, hired in 1985, fresh from earning a Ph.D. in physics from MIT. (Today Frank is chief information officer.) Peterffy expanded his handhelds and algorithm-driven trading to exchanges across the country. “He was a very farsighted guy, probably the smartest guy in the securities business when I knew him on the American Stock Exchange,” says Arthur Levitt Jr., who chaired Amex in the 1980s and the SEC in the 1990s.

In 1993 Peterffy created Interactive Brokers as a broker-dealer to sell Timber Hill’s electronic trading capabilities to the public. (Timber Hill is now a division of Interactive.) It seemed a logical way to leverage his technology investment, but Peterffy’s profits still came mostly from marketmaking and trading. He turned down a buyout offer from Goldman Sachs and in 2007 sold 10% of Interactive’s shares in a public offering, pocketing $1 billion.

Peterffy was at the top of his game. The exchanges had finally digitized, and Interactive “was way, way ahead of the curve,” says Keith Ross, who competed with him for two decades.

But then the disruptor got disrupted. A new generation of high-frequency traders overtook his marketmaking operation in speed and efficiency, squeezing its profits.

The brokerage unit became his cash cow. Between 2007 and 2013 both revenue and pretax profits in Interactive’s brokerage business nearly doubled–to $814 million and $391 million, respectively. (That’s out of a $12 billion-plus market for discount brokerages .) Meanwhile, the marketmaker’s profits collapsed–from $331 million pretax in 2009 to only $72 million in 2013. The divergence was even sharper in the quarter ended Sept. 30. The brokerage earned $152 million pretax, while the marketmaker sank into the red, recording a $112 million loss due to currency adjustments, a trading error and a generally tough, competitive environment. Interactive’s stock, now trading at roughly its IPO price, has outperformed the S&P over the last three years, thanks to the brokerage business.

Peterffy’s operations are headquartered in a nondescript redbrick office park in downtown Greenwich, Conn., 15 minutes from his estate. There traders and programmers silently peck away, four computer screens at each desk and more hanging overhead. A corner space resembling an air-traffic control room is staffed 24/6 by a dozen network engineers. This is a platform designed for active traders and independent market pros. Commissions start at a rock-bottom $1 for a 100-share trade and fall to half a penny a share for larger trades. As the table (see p. 72) shows, competitors with flat per-trade fees can end up cheaper for some purchases.

But Peterffy doesn’t compete on commission prices alone. Customers who keep a $100,000 balance or rack up $10 a month in trading fees get free access to Interactive’s Trader Workstation (available through a desktop program, on mobile or through the company’s website). It offers such sophisticated tools as the Probability Lab, where investors can model the future price of an option on a bell curve, and the Mutual Fund Replicator, which analyzes a fund’s portfolio and points to a similar low-cost ETF as a replacement. Another selling point is cheap margin loans: Interactive might charge 0.96% interest on a $1.5 million loan, while rates at Schwab and TD Ameritrade could top 6%.

As with some other brokers, Interactive’s computers scan different exchanges and dark pools and will even split up an order to execute it at the best price. But Peterffy emphasizes that, unlike other brokers, Interactive won’t sell its order flow to another firm that might trade against those orders.

Gabelli’s Sykes argues Interactive’s systems are unique enough to provide an edge. “I suppose their model could be replicated, but it would be extraordinarily difficult,” he says. Interactive’s broad product offerings and sophisticated trading systems create a “significant moat,” Sykes adds.

Now instead of spending his days supervising traders and his nights designing programs, Peterffy is knee-deep in the muck of customer service, sales and marketing. Interactive uses Web search ads (keyed off “discount broker”), print and TV. After a disappointing experience with Madison Avenue it does its print work in-house. TV campaigns are developed by the advertising divisions of CNBC and Bloomberg News.

Peterffy seems aware that his spot boasting “We build technology so you benefit from fragmented markets” fell a little flat. “Advertising is so touchy-feely,” he says. “You have to speak to the psyche of the people. I’m not very good at that.”

Surprisingly, speaking from the heart did work for Peterffy during the 2012 election, when he released an ad in which he decried creeping socialism in America. It came off as genuine, if somewhat jejune. Peterffy says it even brought in a few new customers.

At his Greenwich office Peterffy watches a proposed new ad. In it two good-looking guys are playing squash, trading volleys and discussing their careers while the ball careens around the court. One finally makes a kill shot and emerges the winner. Not coincidentally, the victor is an advisor who has just gone independent using Interactive’s platform. Peterffy isn’t sold on the existing tagline (“I’ve never slept easier”). “I’m thinking of changing it,” he says. His alternative: “No, that’s just it.” He laughs, realizing just how inscrutable that sounds. He’s still getting the hang of this marketing thing.

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