Telltales Founder Stories: Interactive Brokers
How Thomas Peterffy's Journey Reshaped Modern Trading
This document is Gwendolyn Lawrence’s private work and should not be disseminated without her permission. It is prepared for research purposes only and does not constitute investment advice.
Thomas Peterffy was born on September 30, 1944, in Budapest, Hungary, to a family of impoverished aristocrats who had lost everything to Soviet rule. His birth took place during a Russian air raid in the basement of a hospital. Hungary was deeply impoverished and repressed by Russia, so Peterffy’s father moved to the United States in 1956. In 1965, at 21 years old, Peterffy also immigrated to the US1.
Peterffy spoke no English and had little support from his father, who had no room to support his son. The only available well-paying job as a non-English speaker was as a computer programmer. Peterffy had received a limited education in engineering and was able to understand programming manuals, which required only about a hundred vocabulary words- an achievable goal as compared to learning the entire English language all at once. Peterffy found a job working as a computer programmer for a highway designing firm2.
Computers were a new technology at the time, and the firm that employed Peterffy only owned one. Peterffy volunteered to learn how to program it and gained coding experience.
Eventually, Peterffy moved on to work at a consulting firm that built computer programs for Wall Street brokers. He worked on constructing programs that could sort stocks by P/E ratio, book value, and price. After a brief period at that job, Peterffy progressed to work for a commodity trading firm called Mocatta Metals.
Peterffy’s role at Mocatta Metals was to figure out how to price options. At the time, the mathematics of option pricing were not well known and had no formula definition. Peterffy spent time running models and simulations and eventually came up with an effective pricing model, a precursor to today’s Black-Scholes model. With exclusive knowledge of a valuable pricing formula, Peterffy was able to save $200,000 from his job. In 1977, he used $36,000 of his savings to purchase a seat on the American Stock Exchange and became a market maker.
Armed with his formula and a list of fair prices for options which corresponded to different stock prices and expirations, Peterffy began his first company, T.P. & Co. Peterffy brought on several employees and began putting them to work manually buying and selling stocks. T.P. & Co. became the first company to use pricing sheets on a stock exchange floor in 1979. Peterffy compensated his workers with a 30% cut of any profits they produced. However, he found this system unprofitable and decided to computerize the process.
In 1982, Peterffy changed the name of T.P. & Co. to Timber Hill Inc. One year later, Peterffy introduced handheld computers into his trading system. Peterffy put computer screens which displayed fair prices onto stock floors and directed his employees to underbid and sell based on this information, profiting off of the time difference between the offers. Timber Hill Inc. revolutionized the trading process by becoming the first to use handheld computers for trading.
In 1987, Peterffy further advanced his processes by engineering the first fully automated algorithmic trading system which could independently create and submit orders to a market. The system was made up of an IBM computer that could read data from a connected Nasdaq terminal and carry out completely automated trades based on that information. The system worked faster than a human trader, but the Nasdaq banned the machine, requiring that trades be inputted manually. In response, Peterffy designed a system that allowed the machine to input orders with mechanical fingers. The Nasdaq accepted the system as legitimate. However, the US stock exchange still remained behind the technological cutting edge.
The European stock exchange had recognized the potential in technology to speed up trading, but the US market was held back by specialists who had a vested interest in keeping the system manual- it gave an edge to those with more knowledge of the system.
After encountering increased competition in the option market-making business, Peterffy decided to branch into the brokerage business. He founded Interactive Brokers Inc., which focused on automating the job of a broker. By using inexpensive computerized labor, Interactive Brokers could cut costs, increase profits, and share those increased profits with clients. In 2000, The International Securities Exchange kicked off financial automation in the U.S.3 By 2001, Interactive Brokers was handling an average of 200,000 trades a day.
In 2002, Interactive Brokers introduced its Mobile Trader as well as an application programming interface which allowed customers and developers to integrate mobile phone systems with Interactive Brokers’ trading system. Two years later, this system was updated to include real-time data such as charts and fundamental analytics.
On May 3, 2007, Interactive Brokers went public at $30.01 per share, selling 40 million shares4. In 2020, Interactive Brokers reached a million customers. Approximately 8% of the global options market is on the Interactive Brokers platform. Thomas Peterffy attributes this astronomical success to the cycle of the low cost and high volume of Interactive Brokers’ trades. In an interview, Peterffy joked, “the question is why does Interactive Brokers do more trades than any other broker? The answer is because it's the least expensive broker. Why is Interactive Brokers the least expensive broker? Because it does more trades than any other broker.” He further explained that every trade Interactive Brokers carries out provides the platform with more statistical data it can use to improve the effectiveness of the platform.
Peterffy characterizes Interactive Brokers as a company of computer programmers rather than brokers. Rather than focusing on the individual sales, Interactive Brokers has mastered the foundation on which those sales depend. Now, Interactive Brokers carries out more trades than any other broker.
Peterffy’s personal values stem from his formative years in Hungary. He has spoken extensively about his views on economics and politics. In 2012, Peterffy posted a video to YouTube urging viewers to vote Republican5. His primary arguments revolved around his distaste for socialism, a view he has publicly spoken about many times. Peterffy’s belief in merit and hard work above all show themselves in Interactive Brokers’ culture: the beginnings of Interactive Brokers’ technology comes from Peterffy’s willingness to disrupt the status quo of manual trading in the American Stock Exchange. Peterffy knew that computerized trading could do better than human traders and lobbied for innovation despite the protests of long-standing experts who were profiting off of an antiquated system.
Thomas Peterffy stepped down from CEO of Interactive Brokers in 2019, however he remains a large part of Interactive Brokers’ leadership, serving as Chairman of the Board of Directors. Milan Galik was named as his replacement and has overseen the company’s continued growth, with the platform reaching 2.5 million accounts in 2023.