FT article on IB: Unlikely Refco candidate, with vision

By Jeremy Grant in Washington
Published: October 26 2005 18:51 | Last updated: October 26 2005 18:51

When Thomas Peterffy first stepped into the options trading pits at the American Stock Exchange in 1977 the young trader immediately drew attention to himself – and not just because of his Hungarian-accented English.

The former computer programmer was carrying a contraption he had designed to trade options contracts electronically – bypassing the face-to-face trading that floor traders had used for years.

“People were rather suspicious,” says Mr Peterffy, now 61 and chairman of Interactive Brokers, which on Wednesday signed a confidentiality agreement with the collapsed broker Refco over its plan to bid for the group’s futures unit.

“But then people realised how much money could be made trading this way – once I got the kinks out of it,” he recalls.

When the history of electronic futures and options trading is written, Mr Peterffy and his trading device are likely to feature prominently.

The Hungarian emigrant dogged faith in the efficiency of electronic trading over human interaction has helped him build Interactive Brokers into a pioneer in electronic trading.

Bill Brodsky, a former head of options trading at the Amex and now chairman of the Chicago Board of Options Exchange, says: “[Peterffy] was making markets electronically when people didn’t know you could do it, let alone how you could do it.”

Interactive Brokers is the largest privately held US securities firm with capital of $2bn and $18bn in assets. It handles about 20 per cent of US options volume and about 16 per cent of the world’s options volume.

As observers size up a list of bidders for Refco’s futures unit, Interactive Brokers may seem an unlikely candidate because the firm – unlike Refco – grew without making acquisitions. At $858m, Interactive Brokers’ bid is the highest of three, including one from a consortium led by Merrill Lynch with private equity group Warburg Pincus and Susquehanna, one of the world’s largest Nasdaq and options market makers. The other is an $828m offer from Dubai Investment Group.

US-based Marathon Asset Management, Apollo Management, the UK’s Man Financial, and Chicago-based TradeLink are all mulling bids.

Yet Mr Peterffy believes his firm has an edge because of its history of technological innovation.

Interactive Brokers was the first derivatives broker to offer trading not only of options electronically, but of futures, equities and other cash securities – all on one computer screen.

This has proved attractive as traders increasingly carry out “multi-asset” trading, ignoring traditional distinctions between futures, options and equities as they express their opinions on the future direction of asset prices electronically.

Mr Peterffy says that Interactive Brokers’ technology makes a good match with Refco’s “tremendous marketing capacity”, Mr Peterffy says from his headquarters in Greenwich, Connecticut, where he keeps a stable of horses.

Much of Refco’s futures business consists of a retail operation, often seen as a less attractive business involving high net worth clients – occasionally referred to in the futures industry as “the dentist in Des Moines”.

It is the institutional business on which bidders such as Mr Peterffy are likely to be more focused, especially since Refco’s acquisition of Cargill Investor Services, one of the biggest brokers at the Chicago Board of Trade.

Mr Peterffy reckons that linking his company with Refco would double the number of customer transactions at Interactive Brokers to 1m. He says he may be interested in Refco’s separate securities business, but that “it may be beyond repair”.

Concern remains about customer defection. “We very much hope that there will be a business left to auction off,” says Mr Peterffy, who gambled on his future by leaving Hungary “for a new life, for capitalism” in 1965.

“As a wild guess I would say they have 150,000 accounts now. So long as we have – say – 50,000 accounts left, it’s interesting for us.”

 

http://www.iinews.com/site/pdfs/IIMag_InteractiveBrokers_Nov_2005.pdf

Institutional Investor article on Thomas Peterffy, founder of Interactive Brokers.

 

wonder if ib has intention to go public in the future and will offer its clients the opportunity to partecipate in the ipo.

 

thanks for sharing, very interesting

 

Good article. Thanks for posting.

OT

 

IB should offer any IPO they can get into to their customers. I would also like to see them offering macro and stock research that they can get through one of their Wall Steet contacts.

 

I don't understand how such a sophisticated guy...
Can run IB in such an ultra-conservative manner...
And treat professional traders as if they were your grandma.

Also...
IB still has a serious problem with promotion...
And does not run effective ad compaigns.

Also...
What's with their clearing business?
Wall Street has so many dinosaur Clearing Firms that think it's still 1995...
And could never, ever compete with IB.

You cannot convert a Legacy Firm to the IB model...
You can only build it from scratch.

rm+

 

That's an amazing article.

Biggest mistake Mr. P. has made to date is overestimating the intelligence of the customer base.

Hope he doesn't read some of the postings here, he'd probably want close up the retail shop altogether.

 

Retail = Casino

When you are the House...
You want your customers as dumb as possible... even FT dumb.

The problem with IB's strategy...
Is that their Business Model does not significantly differentiate...
Between someone making 100 trades/day and someone making 1/week.
Other than trivial stuff... the former gets exactly what the latter gets.

This is stubborn and irrational and has slowed their growth.
It's diluting their competitive advantage at a steady rate.

For example...
They Stock Loan list looks good at first sight...
But it's inaccurate and a crapshoot.

They could hire 3 people at $40,000...
And set up a little Stock Loan Department...
To locate and lend out stock on the Street...
Give the number to their Top 1-2% shorts.
It would be a nice little profit center...
But it's against their Religion.
(They may even have one... but won't tell me about it).

rm+