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COVER STORY

Peterffy: Hes made

a career riding

against the wind

By Suzanne McGee

JohnMadere

How a stubborn, pennilessrefugee defied Wall Streets

conventional wisdomto become a self-made

billionaire and a drivingforce behind the automation

of global securities trading.

Is a Refco takeover next?

ABREEDAPARTABREEDAPART


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OOn a small table in Thomas Peterffys office stands a bronze statuette: Salvador Dals rendition of Alice in

Wonderland, the bemused literary invention of Lewis Carroll. The founder of Interactive Brokers Group

came across the sculpture while traveling in Italy three years ago and immediately identified with it. To

Peterffy, a computer programmer who has spent most of his life fighting to modernize securities trading, Wall

Street has often resembled an upside-down world where people foolishly and inexplicably cling to the status

quo rather than embrace common sense innovations.On Wall Street I feel like I am Alice in Wonderland,

chuckles the 61-year-old during a rare extended inter-view with Institutional Investor. Especially puzzling, hesays, is how people continue to shout and gesture at oneanother to trade securities when computers can do the

job far better. Nothing makes sense. Everything is mixedup and different than I think it should be.

Over the course of more than three decades in finance,the stubborn Peterffy has battled to set things straight.Since 1977, when he left a job developing commodities-trading software to become an op-

tions trader on the AmericanStock Exchange, he has refused toaccept the clubby, backward reali-ty of the trading world. Instead hehas striven to remake it accordingto his vision of supreme efficiencythrough automation. Along the

way the once-poor defector fromCommunist Hungary has builtthe 16th-biggest securities firm inthe U.S., specializing in the trad-ing of options and other deriva-tives, and turned himself into abillionaire several times over. Hehas exerted a profound influence on the way stocks andoptions trade globally, helping to speed the ascendancy ofelectronic exchanges and to lay the foundation for the al-gorithmic trading craze that is reinventing how shares ofstock change hands (see page 47). His vision of the way

Wall Street should work has gained him the ear of finan-cial regulators, who have adopted many of his ideas re-garding market structure.

Interactive Brokers today is one of the worlds biggest

market-making firms, dealing in more than 9,400 securitiesand doing business electronically on more than 50 exchangesaround the world. Peterffy owns 85 percent of the Green-

wich, Connecticut based firm, which takes in revenues of$1 billion annually and books half of that as profit.

But Peterffy is not content to sit still. Late last monthhe brought Interactive Brokers into the bidding for partsof troubled derivatives brokerage Refco, which filed forbankruptcy protection after federal prosecutors chargedits former CEO with disguising $430 million in customerdebts to boost the fortunes of the companys August IPO.Such a deal could instantly supercharge Peterffys broker-

age operations, whose growth has lagged that of his firmsmarket-making business. But considering Refcos uncer-tain state, it would be a risky move for someone who hasso carefully engineered his success until now (see box).

Peterffys considerable accomplishments notwith-standing, outside rarefied trading circles few have heardof him or his firm. And thats just fine by him. An in-tensely private man, he sometimes speaks to the press orpublishes papers in academic journals to voice his viewsabout market structure, but he has long shunned publici-ty pertaining to his personal life and career.

Thomas is one of those rare

people who doesnt seek fame orwealth for its own sake but focus-es on doing what he considers tobe right and necessary, says PhilipDeFeo, who was CEO of the Pa-cific Exchange, one of the manystock and options markets thatcount Interactive Brokers as amember, until its acquisition by

Archipelago Holdings earlier thisyear. Peterffy was instrumental,for instance, in helping persuadethe Securities and Exchange Com-mission in 1999 that U.S. options

markets could be linked electronically to ensure that in-vestors receive the best possible prices. He risked every-thing to push for more-efficient electronic tradingnetworks and helped persuade the financial world these

were possible and preferable, DeFeo says. If you look ata lot of innovations and intriguing market structure pro-posals, at their roots youll often find Thomas.

But Peterffys intensity also has a downside. He is driv-en by an unstinting belief in efficiency as an organizing

principle not just for markets and business but for allof society. His commitment to this ideal is the key to hissuccess, but it can manifest itself in the eyes of others asegomania, condescension and micromanagement. AndPeterffys unwillingness to suffer those who lack that com-mitment has alienated colleagues and business partnersover the years, preventing his firm from becoming evenlarger and more influential. He typically shuns marketingand advertising, for example, as needless and inefficient ifa product or service is truly valuable. (A recent campaignto attract Refco customers is a rare exception.) Peterffysforceful personality has turned away numerous potential

As I stood on the

floor, I was constantly

fantasizing about

how to put what

I was doing into a

computer program.

INSTITUTIONAL INVESTOR NOVEMBER 2005


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acquirers, including Morgan Stanleyand Goldman, Sachs & Co. Gold-man very much wanted to buy thefirm in 1999 before it swallowed uptwo similar concerns, Hull Groupand Spear, Leeds & Kellogg.

He has an idealistic view of the

world, says Thomas Russo, a vicechairman of Lehman Brothers whohas known Peterffy for nearly 30years. He figures if all financial mar-kets are as efficient as they can be,then it will be a better world. He isdriven to pursue that goal. And he isvery single-minded about it.

AVOIDING THE CROWD ISsomething that Peterffy learned at anearly age. Born in the basement of aBudapest hospital during a 1944bombing raid by the Russians (Hun-gary was an ally of the Axis powers dur-ing World War II), he grew up in afamily whose past successes as mer-

chants, landowners, soldiers and politi-cians quickly got them branded as ene-mies of the postwar Communistregime. Teased at school, where he re-fused to accept the partyindoctrination of Hungarian youth,Peterffy was regaled by family mem-

bers with tales of past wealth and glory.I didnt grow up in a great deal

of abundance, but I heard abouthow good it used to be before the

war, he says.As a young man Peterffy decided

there was no future for him in Hun-gary, and in 1965 he left his engi-neering studies in Budapest andmoved to New York. He spoke noEnglish but found his way in the cityby reaching out to family friends

who had also fled the Soviet-backedgovernment. Soon he landed a job asa draftsman designing highways foran engineering firm. The work didntpay much; Peterffy shared a spartan

railroad apartment on ManhattansUpper East Side, complete with abathtub in the kitchen, with Christo-pher Tors, a fellow migr.

Our parents had been friends,and it was suggested that we couldshare an apartment, recalls Tors,

who later became a trader at Gold-man and now runs Sasqua Group, afinancial markets recruiting firm. Heremains Peterffys closest friend.

When Peterffys engineering-firmbosses bought a new computer andasked for volunteers to learn how toprogram it, he was quick to step for-

ward. Computer language was easi-er to learn than the Englishlanguage, he explains. I realized if Icould master the way computers

worked, I could find a job, so I sortof taught myself from the manuals.

His logic paid off: By 1967, Pe-terffy had landed a job at Aranyi As-sociates, a computer consulting firm

Peterffy enters the battle for Refco

Thomas Peterffy, the iconoclastic electron-

ic trading pioneer and founder of Interac-

tive Brokers Group, can be as difficult to

work with as he is brilliant about markets. Hisuncompromising personality is one reason the

$2 billion-in-capital firm has grown solely by or-

ganic means over the past three decades, rather

than through mergers and joint ventures like

other market-making and brokerage houses.

But with his bold bid last month to acquire

the exchange-traded futures unit of scandal-

plagued Refco, Peterffy showed he is prepared

to change his go-it-alone formula.

Acquiring the Refco unit, which before its

October 17 bankruptcy filing was the worlds

largest futures brokerage, would be a quick,

potentially cheap way for Peterffy to super-charge Interactives brokerage division. That

customer-facing part of the firm, launched in

1993, has failed to grow as fast as its older

and more successful market-making unit,

which operates on 55 exchanges around the

world. It would result in the preeminent

global futures and options brokerage, says

Peterffy, adding that he is familiar with Refcos

business after trading the same markets for

many years. I know how they trade and how

to deal with them.

Refcos bankruptcy filing came after it

forced out CEO Phillip Bennett, who is facing

securities fraud charges for allegedly hiding

$430 million in debts from investors in RefcosAugust initial public offering. Bennett has

denied any wrongdoing and is contesting the

charges. J. Christopher Flowers, a former

Goldman, Sachs & Co. partner who now runs

a private equity firm, emerged as the first suit-

or for the bankrupt unit, bidding $768 million,

a fraction of its estimated prescandal value.

At about the time of Flowerss offer, Pe-

terffy also reached out to indicate his interest.

The bankers and lawyers handling the sale for

Refco at Goldman and law firm Skadden,

Arps, Slate, Meagher & Flom were not re-

ceptive, he says. We couldnt get any conver-sation going with them, Peterffy asserts. We

thought we were completely frozen out.

Responds a Goldman spokesman, We put

every approach that we received to the board

members. Skadden partner J. Gregory Mil-

moe said during a bankruptcy court hearing

last month that Peterffy was among several

bidders who had contacted him but that there

were a number of people in that boat that we

hadnt had time to reply to before filing for

Chapter 11 protection.

Frustrated, Peterffy ran full-page ads in the

Wall Street Journaland other national papers

soliciting Refcos customers. Normally loath to

advertise (story), Peterffy is glad he did in thiscase. A number of Refco clients have trans-

ferred their accounts to Interactive Brokers, he

says, declining to elaborate.

By the end of October, Interactive Brokers

had found its way into the auction process and

stood as the highest bidder, willing to pay

$858 million for the Refco unit. But several

other entities, including multibillion-dollar pri-

vate equity firms Warburg Pincus and Apollo

Advisors, were also circling, and the outcome

of the auction was still very much up in the air.

(Final bids for the November 9 auction were due

by November 4.) In any case, taking over theRefco brokerage may involve substantial risks,

given that authorities continue to investigate the

firms finances and that customers may con-

tinue to flee. We look forward to the opportuni-

ty to conduct due diligence, Peterffy says.

Regardless of the outcome, Peterffys in-

volvement speaks volumes about the extent

of his ambition. At 61, hes not stepping down

as CEO anytime soon. And if furthering his

firms reach means abandoning his lone-wolf

approach, he appears willing to do so.

NOVEMBER 2005 INSTITUTIONAL INVESTOR


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run by Hungarian immigrant JanosAranyi. It designed early financialmodeling software for Wall Streetfirms. Long before the birth ofspreadsheet programs like Lotus 1-2-3, Peterffy built tools that let analystscalculate stock and bond valuations.

A few years later he jumped to com-modities trading firm Mocatta Met-als, where he developed trading andanalytics technology for anotherHungarian expatriate, famed metalstrader Henry Jarecki. Peterffy beganto learn the ins and outs of the finan-cial markets from Jarecki, a psychol-ogist by training.

I learned an immense amountfrom Henry about how the markets

worked, says Peterffy. Perhaps thebest lesson was to not let my mindbecome clouded by conventional

wisdom.Within a few years Peterffy had

become one of Jareckis most trustedcolleagues. There was no importantmeeting that Henry attended with-out Thomas at his side, recalls EarlNemser, then outside counsel forMocatta and now a vice chairman atInteractive Brokers and one of Pe-

terffys few close friends.Even after Peterffy left in 1977 for

the Amex floor, Jarecki continued toconsult with him on important mat-ters. One such instance took place in

January 1980, shortly after thewealthy Hunt family of Texas organ-ized an investment pool that nearlycornered the silver market and desta-bilized trading in precious metals

worldwide. Jarecki asked Peterffy toattend a meeting of officials fromvarious metals exchanges and bigmarket players, including thenSa-lomon Brothers chairman John Gut-freund, to discuss how to cope withthe massive oversupply of silver.Should traders get together and buythe surplus? And if so, at what price?

An hour into the debate, Peterffyspoke up. He just said, This is theright price and came out with anumber, as if hed been sitting there

juggling data in a computer, saysNemser, who cant remember theprecise figure. The amazing thing

was, that was almost exactly the priceat which silver settled three or four

weeks later.By then Peterffy had become well

practiced at running complex calcu-lations in his head. Upon deciding in1977 to plunge his $200,000 in sav-ings into an Amex seat, he had al-ready determined to try to applycomputer trading models to thebrand-new world of listed-optionstrading. At the time, the Amex andother exchanges didnt allow com-puters on the floor; when Peterffyneeded updated valuation informa-tion, he ferried an assistant to a mid-town Manhattan office that housedhis computer, then back to the ex-change with the new data. After trad-ing hours he would write code basedon what hed seen each day at the

Amex. As I stood on the floor, I wasconstantly fantasizing about how toput what I was doing into a comput-er program, he recalls. I began cod-ing it in my head as I stood in thecrowd, and then Id jot down the

program later on.Peterffys systematic approach

made him stick out like an odd lot inthe burgeoning options world. TheChicago Board Options Exchangeand the Amex options floor had onlybeen open for a few years. In time,the revolutionary options pricingmodel developed by Fischer Blackand Myron Scholes together withthe rapid evolution of the personalcomputer would transform op-tions into one of the worlds fastest-growing trading markets. But in thelate 70s, the exchanges were stilldominated by Wild Weststyle spec-ulation. A booming voice, hulkingframe and nerves of steel made agreat trader, not computer skills andsophisticated quantitative models.

Not surprisingly, during his earlyyears in the market, Petterfy was con-sidered wacky and eccentric.

He didnt fit the normal mold,says CBOE chairman William Brod-sky, who then served as vice presidentof options trading on the Amex staff.He had this heavy Hungarian ac-cent, he came to the floor after work-ing in IT, and he had been at a

commodities firm. He was a goldand silver guy, not a stock guy.

Peterffy, as is his wont, puts itmore bluntly: The other guyslooked at me as if I was absolutelymad.

In 1978, Peterffy formed T.P. &Co. to expand his activities at the

Amex. He hired four other traders,whose buying and selling were aidedby what he called fair-value sheetsthat the firm generated with comput-ers every morning. Over the next fewyears, the T.P. & Co. began to exper-iment with arbitrage and pairs trad-ing. All the while, Peterffy wasfocused on a bigger goal. Following

Jareckis mantra of not acceptingmarkets as they were but rather envi-sioning them as they should be, heforged ahead with the developmentof his computerized trading system.

In 1982 he reorganized T.P. & Co.

into a new firm, named Timber Hillafter two roads in a favorite upstateNew York retreat. Timber Hill be-came both a vehicle for Peterffysown trading activities and a labora-tory for bringing his vision of effi-ciency to the wider market. He hiredseveral other traders and designedhandheld computers to help themcontinuously determine the fair val-ue of options. The goal: to use thehandhelds for making markets onthe Amex and then expand to theCBOE, the biggest U.S. options ex-change at the time.

Timber Hills early years were any-thing but an unmitigated success. Ithad to overcome resistance from ex-change officials and fellow floortraders. Peterffy was able to persuadethe Amex that his devices would ben-efit the market, and the exchangepermitted him to bring them onto



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the floor in November 1983. At theCBOE, however, he encounteredstiff opposition: A committee ruledthat Peterffys box, which measuredabout 12 inches long by nine inches

wide and a few inches deep, was toobig to use in the tightly packed trad-

ing crowd. Though astonished thatCBOE members didnt appreciatethe benefits of his system, Peterffy

went back and redesigned it to beabout the size of a childs lunch box.(He keeps some of the old devices ina display case in his office.) After asecond hearing the CBOE panelabandoned its size objection and cutto the heart of the matter, ruling thatno analytical devices could be usedin the pits.

It caused a brouhaha, recalls aformer CBOE trader. People gotkind of hysterical at the idea ofchanging the rules.

Recalls Lehman vice chairmanRusso, who was then a partner atNew York law firm Cadwalader,

Wickersham & Taft and representedPeterffy in his battles, It was obvi-ously a case of people fearing innova-tion. Tom had his vision, and he

wanted to implement it, but theywere afraid that this new technologywould change their world toomuch.

Peterffy scuffled through the nextfew years, occasionally wondering

whether his embryonic market-mak-ing business could survive the set-back. His business plan depended onearning enough from trading withthe first generation of handhelds topay for exchange-seat leases and toinvest in a more sophisticated sys-tem. Blocked by the CBOE, hesought to do business on other trad-ing floors. In 1985 the fledgling op-tions division of the New York StockExchange permitted Peterffy to de-ploy his technology, hoping that it

would attract liquidity from its big-ger rival in Chicago. But exchangeofficials insisted that the devicescould be used only at trading booths

located as much as 30feet from the crowd

where transactionswere executed. Toovercome this prob-lem, Peterffydeveloped a code sys-

tem in which TimberHill personnel usingcomputers at thebooths flashed mes-sages using coloredlights, each repre-senting a numberfrom zero to nine, totheir colleagues inthe pits. It tooktraders about twodays to learn the sys-tem, after which theycould read the lightdisplay as readily asthe digits on a com-puter screen. Thisquickly caused a stiramong other traders.

A few began to whis-per about some kindof bizarre insider-trading scheme. To reassure the ex-

change and fellow members thatnothing mischievous was going on,Timber Hill distributed the code toeveryone, Peterffy recalls.

While continuing to fight theCBOE in the mid-1980s, TimberHill earned enough from its opera-tions on other exchanges to invest innew technology that would eventu-ally help to revolutionize all securi-ties trading. Peterffy built acommunications network with con-nections to stock and derivatives ex-changes around the world. Bycombining this network with the al-gorithms hed written over the yearsto help him decide when to buy orsell, Peterffy created a system thatcould route orders to the destinationoffering the best prices, allowing histraders to make tighter markets whileinstantaneously and hyperefficientlyhedging their risk. Timber Hill was

regarded as the leader among a hand-ful of firms, including Hull Groupand Susquehanna InvestmentGroup, in developing such technolo-gy at the time.

A critical turn came in 1987. TheChicago exchange was about to shutdown trading in its Standard &Poors 500 index options, which hadfailed to attract sufficient trading in-terest after four years. Sensing an op-portunity, Peterffy pledged toexchange officials that Timber Hill

would make tight markets in theproduct for a year if they wouldlet him use his handhelds in the pit.

With nothing to lose, the CBOEagreed. By the middle of 1988, Tim-ber Hills ability to post attractivebuy and sell prices for the optionshad begun to draw in more traders.Today options on the S&P 500 arethe most actively traded index op-tions in the U.S.

Peterffys contrarian gamble on

Lehmans Russo, who represented Peterffy in his battlesto automate floor trading: He figures if all markets areas efficient as they can be, it will be a better world

ToddFrance



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the S&P contract helped to super-charge the growth of his firm. Dur-ing the 1990s he continued to investin his trading network. He intro-duced a feature that could split bigorders for the same security intosmaller pieces and send them to dif-

ferent exchanges as prices moved.The new system offered far more ef-ficient executions than anything thathad preceded it and became thefoundation for Interactive BrokersGroup as it exists today.

In 1993, Peterffy split the firm intwo. The electronic market-makingbusiness continued to be known asTimber Hill. A new discount broker-age operation called Interactive Bro-kers, was set up to serve institutionsand individual investors. Orders frombrokerage customers were sentthrough the network, executed and re-ported to clients in a fraction of a sec-ond. The brokerage division offeredexecution not just of stocks and op-tions but also of exchange-tradedfunds, futures, bonds and currencies.Both units were organized under aholding company that Peterffy stillcontrols and operates, Interactive Bro-

kers Group. That firm, with $2 billionin capital, is the 16th-biggest securi-ties firm in the U.S., according to a re-cent II survey (Letting it Ride,Institutional Investor, April 2005).

Peterffys once-tiny firm hadgrown to 298 employees by the endof 1996; the head count today standsat 477. Most are programmers andIT workers. His market-making op-erations, which profit from provid-ing a two-sided market in thousandsof securities (the firm pockets the dif-ference between the prevailing buyand sell prices), expanded from the

Amex, the CBOE and the NYSE toeight exchanges in 1990, 31 in 1997and 55 worldwide today. The broker-age unit more than doubled its fund-ed accounts in the past four years,from 23,000 to 58,000.

Its no accident that securitiesmarkets have evolved to resemble Pe-

terffys vision. Countless firms havecopied his so-called smart orderrouting technology. Direct-accessand algorithmic systems patternedon the Timber Hill model have beenembraced by the biggest Wall Streetfirms including Credit Suisse First

Boston, Goldman, Merrill Lynch &Co. and Morgan Stanley as thebest way to scrape out profits in anincreasingly efficient, low-margin eq-uity trading business. After Peterffydemonstrated his system tothenSEC chairman Arthur Levitt

Jr. in 1999, the agency became con-vinced that U.S. options exchangescould link electronically to ensurethat investors would always receivethe best available prices. The SECsoon mandated such a linkage. Pe-terffy pressured exchanges that resis-ted moving from floor trading toautomated execution. Timber Hillquickly became one of the biggestmarket makers on the all-electronicInternational Securities Exchange

when it debuted five years ago.(More recently, Peterffy has thrownhis support behind another all-elec-tronic market, the Boston Options

Exchange.) The ISEs successprompted the CBOE and the PacificExchange to introduce their own au-tomated execution systems. Twoyears ago Timber Hill stopped mak-ing markets on the Amex and thePhiladelphia Stock Exchange becausethey lacked similar platforms. Bothare now working on systems to auto-mate trading in hopes of stemmingthe flow of business to competitors.

The markets have finally comearound to his way of thinking, saysHans Stoll, director of the FinancialMarkets Research Center at Vander-bilt University in Nashville, Tennessee.

Yet Peterffy doesnt consider him-self a trader. Im a computer pro-grammer, and so are all of the mostimportant people in my company,he says, adding that programmersoutnumber other Interactive Brokersemployees by a ratio of 5-to-1. He re-

spects the instincts and versatility oftalented traders but argues that, ulti-mately, they cant outperform ma-chines. Any single program may notbeat a really good trader, but all theprograms linked together are so fastand accurate that they will beat any

trader, he says.

PETERFFYS SUCCESS DIDNTcome overnight, and it hasnt remadehis life. To be sure, hes enjoying thefortune hes earned at InteractiveBrokers. He dresses elegantly in cus-tom-tailored suits and lives on themost expensive tract of residential re-al estate in Greenwich. Peterffy, whodislikes big cities especially New

York bought the century-oldhorse farm once owned by airplanemagnate Henryk de Kwiatkowski(boasting everything from four guesthouses to a wine cellar) for $45 mil-lion last year. He started riding at theage of 30 and now owns four horses,for both trail riding and jumping.One of his few outlets outside the of-fice is inviting friends to ride withhim. I bought a place in the coun-try and a horse as soon as I could af-

ford it, he confides. That was alifelong dream of mine.

He also owns an expansive beach-front estate on the Caribbean islandof Antigua. But he often cant pre-vent his slavish devotion to efficiencyfrom seeping into his personal life.Rather than waste money on a flashynew car, for instance, Peterffy rollsback and forth to work in a modest,nine-year-old Lexus sedan. He rarelyvisits his Antiguan refuge, which heusually finds boring. When he doesgo, he typically winds up working. Ihave exactly the same office set upthere so that I can continue to work,he says, waving his arm toward thearray of four computer screens be-hind his cluttered desk at InteractiveBrokers headquarters. Divorced

with three children, all students, Pe-terffy has few close friends aside fromTors and Nemser.



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His personality ensures that hiscompany is still run like a start-upbattling for survival. Meetings arerare. Bureaucracy is shunned like adeadly virus. We may have policymanuals and meetings, but its nothow he thinks a company should be

run, says Nemser, laughing. Hethinks the world is drowning in redtape, and part of my job is to con-vince him that some of that red tapeis needed for a company the size ofours today.

Final negotiations leading to thecreation of the Boston Options Ex-change, in which Interactive Bro-kers has invested $20 million for aroughly 20 percent stake, took only

weeks, recalls a sti ll-amazed WillEasley, managing director of theBOX: I had my first meeting withhim in August 2001. We were hav-ing formal discussions by late Sep-tember and shook hands on the dealby early November.

Indeed, Peterffy refuses to com-promise when it comes to efficiency.For example, he wont bust trades the act of voiding a trade if oneparty can persuade the other that it

made an error even though thatposition has cost him coveted mar-ket-maker slots at various options ex-changes. Every now and thenpeople make errors and executetrades at the wrong price, he says.Sometimes the error is in your fa-vor, and sometimes its not, but everytime you try to bust a trade, youspend a great deal of time and mon-ey. Its just not efficient.

Peterffy has sacrificed quite a biton the altar of efficiency. By his ownestimation, the firms brokerage unithas underperformed in terms of cus-tomer growth. Thats despite marginrates that are among the lowest in theindustry and a bevy of technologicaltools that can be customized forclients. The biggest reason for theunderperformance is probably Pe-terffys profound aversion to market-ing of any kind.

He has a very dif-ficult time under-standing people whosell things for a living.He has a philosophicalviewpoint that anymiddleman is a bit

dishonest, because itmeans you are sellingsomething for morethan you paid for itand the customer isgetting short shrift,says Tors. He alsothinks so thoroughlyabout what he is doingbefore he does it thathe assumes everyoneelse will see the logicof what he is doingand agree with him that if he provides thebest mousetrap, peo-ple will use it for thatreason, not because hecomes up with thefanciest ad campaign.

Reflecting thatview, Interactive Bro-kers marketing presence has been in-

termittent and scattershot.My idea is to create a platform

that is so superior to anything elseout there, so much more valuableand so much less expensive to use,that it will just sell itself, explainsPeterffy. But it doesnt. Im stunned.I can only think of giving peoplemore and more in the product, andeventually they will realize that theyneed it and they will come.

That attitude has frustrated un-derlings over the years. In 1999, forexample, Peterffy hired formerCBOE vice chairman Thomas Asch-er to run the IB unit. But the twoclashed over how aggressively tocourt customers, and Ascher wasgone within a year. (He declines tocomment.) Even those who get along

with Peterffy have to deal with theeffects of his antipathy to salesman-ship. William McGowan, a veteran

options marketing executive who

joined the firm last year as head ofsales, says Peterffy wont go out of his

way to stroke customers. Whenclients come to visit the firms Green-

wich headquarters, for instance, herefuses to send a car to the airport ortrain station, as many competitorsdo. (McGowan has at times offeredrides himself.)

He doesnt understand thateveryone isnt as sophisticated as heis, that they need that extra push,says McGowan, who adds that hehas been able to boost the numberof options contracts executedmonthly by IB from the low six fig-ures when he joined to a currentrate of about 5 million.

Some customers worry that Tim-ber Hills market makers can see theirorders coming into IB and use thatknowledge to trade against them.The firm strictly walls off the two

The CBOEs Brodsky: Peterffy didnt fit the normal

mold of loud, burly traders at the Amex in the 1970s

SaverioTruglia



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Posted and excerpted with permission from the November 2005 issue of Institutional Investor Magazine. Copyright 2005 by Institutional Investor Magazine. All rights reserved.For more information call (212) 224-3205

businesses orders from IB cus-tomers are paired with Timber Hillonly if the market-making unit is of-fering the best available price butPeterffys aversion to promoting thefirm has contributed to an informa-tion vacuum that allows rumors and

worries over this issue to fester.You had guys buzzing about how

they couldnt understand how IBmade its money, says McGowan.By the time the rumor mill was fin-ished, there was negative marketinghappening, and he simply didnt re-alize how important those percep-tions would be.

Despite the massive technologicalchanges in the markets, Peterffy stillbelieves that there are battles to wageagainst inefficiency. He decided tosupport the creation of the BOX, forexample, because it offers a mecha-nism that can improve prices. That,in Peterffys eyes, makes it preferableto other exchanges that allow mem-bers to fill customer orders by exe-cuting them against their owninventories of options, without ex-posing them to the market to see ifbetter prices are available.

Having Thomas on board waskey to getting the big Wall Streetfirms to participate and to gettingSEC approval, says the BOXsEasley. Not one firm refused to meet

with him at a very high level. Hiscredibility with these guys made theproject fall into place.

Surprisingly, Peterffy is concernedabout the proposed merger betweenthe New York Stock Exchange and

Archipelago Holdings, which willmake the NYSE a public company

with a proven automated executionsystem for trading stocks and op-tions. Im extremely worried thatthe NYSE will become a monopolyand that they will raise their fees and

prices, he frets. When you have aprivatized exchange whose goal is tomaximize its profits for shareholders,it is going to be hard for them to re-sist the temptation to act like a mo-nopoly. That, of course, concernsPeterffy on a practical level: Ex-change fees represent half of his firmscosts, its biggest single expense. Buthe also professes more idealistic mo-tives. This could really hurt themarket and efficient markets arevital if we are to have a rising stan-dard of living across the globe, hecontends.

At 61, Peterffy is not ready to takea backseat at the firm he built or evenbegin to groom the next generationof leaders. Though he says theres asuccession plan in place in case some-thing happens to him, he stressesthat absent extraordinary circum-stances, he has no plans to step aside.

In this context, Peterffys bid forRefco might be seen as an effort toaddress his biggest frustration thefact that his firms brokerage unithasnt attracted more clients. If cus-tomers fail to recognize that hes builtthe best mousetrap, hell simply buythem and force them to admit they

were wrong.Still, as his comments about the

NYSE and global living standards in-

dicate, Peterffy seems to be broaden-ing his horizons beyond financialmarkets and envisioning a time whencomputers generate efficiency for theentire world. He spelled out thisutopian goal in an April speech at theannual meeting of the International

Options Markets Association inChicago. An efficient network ableto mediate and facilitate the globalflow of risk capital would, Peterffyargued, help steer a course betweenthe practical impossibility of a cen-trally planned economy and theboom-and-bust cycles associated

with capitalism.Those are high-minded principles.

But dont expect Peterffy to run for

office or try to influence politicsthrough huge donations as his fellowHungarian migr, hedge fund bil-lionaire George Soros, did. Peterffydescribes himself as apolitical andhas little interest in philanthropy, la-beling most charitable efforts as you guessed it inefficient. Rather,he believes he can change the worldby improving its financial markets. Ifefficiency starts there, he reasons, it

will flow through the rest of the econ-

omy and boost the lot of the poor.He has a very idealistic view of

the world and the force of automa-tion, says his friend Russo. Butthen, the things that he preached inthe 1970s that were heresy at thetime have become commonplace to-day. Maybe the best proof of howright he was is his own financial suc-cess. Certainly, you ignore his viewsat your peril.

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