The Interview Discusses:
Thomas Peterffy’s background.
Challenges of adapting to a new country and finding work.
The immigrant mentality and its impact on success.
Importance of maintaining a conservative balance sheet and excess capital.
Future growth areas, including global markets and professional investors.
Interactive Brokers’ unique position in the marketplace.
The potential impact of future presidential administrations on business.
Thomas’s decision to step down as CEO and focus on his role as chairman.
The joy of building and improving the Interactive Brokers platform.
And more...
Click below to download a copy of Boyar Research’s initiation report on Interactive Brokers Group, Inc.
About Thomas Peterffy:
Thomas Peterffy is founder and chairman of Interactive Brokers. A pioneer of digital trading in the 1980s, he was the first to build computer systems able to trade financial assets electronically, independent of direct human intervention. Born in Budapest, Hungary in 1944, he escaped communism in 1965 by emigrating to the United States. He learned computer programming, and his formula for pricing contingent assets was an early version of what is now known as the Black-Scholes model. In 1977, he became a member of the American Stock Exchange. Peterffy built the first automated market-making firm for stocks, options, and futures, which later gave rise to Interactive Brokers, a global electronic broker with a market capitalization of over $50 billion.
Transcript of the Interview With Thomas Peterffy:
[00:00] Jonathan Boyar:
Welcome to The World According to Boyar, where we bring top investors, bestselling authors, and business leaders to show you the smartest ways to uncover value in the stock market. I'm your host, Jonathan Boyar. Today's special guest is Thomas Peterffy, Founder and Chairman of online brokerage giant Interactive Brokers.
Thomas is the epitome of the American dream, arriving from Hungary in 1965 with little money in his pocket, and not being able to speak English. He was able to find work as an architectural craftsman, where he learned computer programming. He also took an interest in options, and by 1977, he had saved up enough money to buy a house.
To purchase a seat on the American stock exchange in 1993, Mr. Peterffi founded Interactive Brokers, which today has a market capitalization of over $50 billion and where he is by far the largest shareholder. I'm especially excited that Thomas on the show and in full disclosure, I personally, as well as my clients own shares in Interactive Brokers, and we featured the company in the October 2023 issue of our institutional research service Asset Analysis Focus.
Without further ado, Thomas, welcome to the show. Thank you very much. Well, again, thank you for coming on. And before talking about interactive brokers, if you don't mind, I'd just love to discuss your experience immigrating to America. As I mentioned in the introduction, you came here with no money, little knowledge of English. First, what made you want to come to the U.S.?
[01:35] Thomas Peterffy:
Well, I came with no knowledge of English. I wanted to come to the U.S. ever since I saw those little stamps on letters from America with the Statue of Liberty on it. So, I grew up in a socialist country, Hungary in those days was a socialist country run by a communist government, where people had absolutely no ability to own anything.
And the state owned all businesses, so nobody really cared. It was not a meritocracy. People did not get any benefit from working hard or having a good idea as to how to make something better. So, nobody did. Therefore, the standard of living was incredibly low. People barely had enough food in those days.
This was shortly after the, I was born at the end of the Second World War. So, collectivist governments and collectivist nations do not work. They do not produce an acceptable standard of living. So, I always wanted to come to America where people were free and there was an opportunity to do something, anything that you wanted to do.
[03:03] Jonathan Boyar:
And when you came here, what was it like? You get out of the airplane and like, where did you go?
[03:09] Thomas Peterffy:
Well, it just so happens that I had a father here who I didn't know because he left Hungary when I was two years old. So, I looked him up. He helped me a bit. And so, he gave me a place to sleep.
So, eventually I got on my two legs and started to look for a job, which I found pretty soon as a draftsman, an architectural draftsman.
[03:40] Jonathan Boyar:
Obviously you immigrated here. I just saw this interesting statistic. Roughly 13 percent of the Forbes annual list of the richest Americans, they're immigrants to this country. And to me, that's a staggering percentage, and it's hard to believe there's a coincidence.
[03:58] Thomas Peterffy:
No, it's not a coincidence. Many people who come here, I mean, not lately, but many people who used to come here in those days or throughout the years, ever since the foundation of this country came because they really had a very strong sense of trying to make it on their own.
So, they came with a purpose. And unfortunately, many Americans today forget that they are the descendants of these people and that they must have inherited some of that drive. So that's why this country still does so well, because people here want to do things.
[04:40] Jonathan Boyar:
Can you teach that drive?
[04:42] Thomas Peterffy:
Teach the drive. I mean, you don't teach drives. I mean, if you have drives, then you learn. You have to have the drive to begin with, I think.
[04:59] Jonathan Boyar:
And you famously, in 2012, you paid for ads, TV ads, asking people to vote Republican because you were afraid of the socialism, which I can understand why you were afraid of it based on your background coming to this country. Do you still have those fears?
[05:16] Thomas Peterffy:
Of course. Yeah. If you look around today, of course you do, because the country is going more and more left. So, of course, I have those fears because unfortunately people do not know that you don't reward people for where rewards in the form of money are not acceptable for merit, then nobody does anything.
So, the country inevitably sinks the standard of living things, too, the lowest common denominator.
[05:52] Jonathan Boyar:
I was talking about your big success. I mean, you've had many Interactive Brokers in researching the interview. I discovered that you were at least partially responsible for one of my favorite movies, Trading Places, and part of the idea came from an interaction with you.
Would you mind just briefly discussing that?
[06:11] Thomas Peterffy:
Yeah, so, sometime, I think, around 1990, I was going to a restaurant with a friend of mine. A bunch of people were sitting around this table, and we sat down with them, and I was sitting next to Aaron. And he asked me what I was doing for a living. So, I explained to him that I was an options trader on the floor of the American Stock Exchange, and I had many people, I mean, several people who worked for me as traders on the exchange.
So, he asked me what was the process. And I explained to him that we had a computer program running up in our office; traders would call up the office and ask what trades to do, and people in the office would read from the computer, print out what trades to do, and the computer was running all day long printing out these trades, and I told them what trades to do, and they did the trades, and they reported back, and the trades were fed into the computer, and new trades were suggested.
So, he said, where do you get these people? And I said, well, really, anybody can do it. So, Melvin, when people were sitting next to him, and Aaron says to me, you mean Melvin could do this? And I said, well, sure. So, he says, No way. 10,000 bet. And in those days 10,000 was still like maybe 50,000 today. So, I said, sure.
So, we made the bet. Melvin came into the office. I gave him two or three days of training. And then he went on to the floor. And he was a very funny guy. He didn't know anything about options, but in two days, I basically explained to him how to trade. And he went up to the floor and he was a very nice guy.
Everybody loved him. He was the first black guy on the floor of the stock exchange. So, he did quite well. And, he would call into the office and ask for the trades and the people gave him the trades and he did the trades. So, he worked for me for a year. And at the end of the year, we got together with Aaron, so I told Aaron that Melvin worked for me for a year, and he did quite well and he has to give me my 10,000, which he did.
And then I heard nothing for a while. And then later on, I heard rumors that he was making a movie out of this experience and, then eventually he came out with the movie Trading Places. So that's, that's how it started. Happened.
[08:55] Jonathan Boyar:
Well, thank you. This is one of the best comedies ever and that's a great story.
And just to segue into your current business, you know, Interactive Brokers, which you founded and you’re Chairman, you've done an amazing job growing interactive brokers, especially over the past decade. You've gone from, I think, 200,000 accounts to over 2 million.
[09:17] Thomas Peterffy:
We are at 2.84 today, 2.84.
Jonathan Boyar:
So is that growth rate sustainable?
Thomas Peterffy:
It definitely is because we have a terrific sales team.
[09:30] Jonathan Boyar:
So, your selling point to clients and potential clients is the best execution possible at the lowest price and having great margin rates?
[09:38] Thomas Peterffy:
Rates and paying high interest on cash. So, we pay on cash, half a percent on their fed funds and other brokers say, well, we don't pay you interest on the cash or we pay you half a percent unless you put the cash into the money market fund. But if you put the cash into the money market fund, then that cash is not available to you to buy stock. First, you have to bring the cash back from the money market fund into your account, and you get no interest, and then you can use the cash to buy a stock.
Jonathan Boyar:
I hope you’ve been enjoying our interview with Thomas Peterffy. To download a copy of Boyar’s Research initiation report on Interactive Brokers, please visit reports.boyarvaluegroup.com/IBKR or email us at info@boyarvaluegroup.com.
[10:15] Jonathan Boyar:
Another selling point is you have a very conservative balance sheet. You have a lot of excess capital and everything is in government securities or very safe instruments of short duration. I guess a little over a year ago you had the mini banking crisis in the U.S. Were you surprised that other firms were not as conservative as you were?
[10:37] Thomas Peterffy:
I was very surprised that many of these firms invested the customer money in very long-term treasuries and other government securities as long as 15 years. So, when interest rates went up to 5%, that paper, the value of that paper fell drastically because, of course, the market demanded the 5%. So, in order for those bills to be at 5%, the original coupon on them was one and a half to 2%. So, the price had to go down. So, as a result, those firms took huge mark to market losses. But of course, given that they were banks, they didn't have to recognize those losses. So, the fact is that some of these firms are still, if they had to mark to market, they would have negative equity.
But it just so happens that banks don't have to mark to market. If they say that they are holding this security to maturity, they don't have to mark it to market.
[11:44] Jonathan Boyar:
And your Interactive Brokers is one of the few really big independent firms left. You have Robinhood, has a market cap of 20 billion with 16 sell side analysts covering it. And then you have Schwab that has, I think, 20 sell side analysts. You only have nine and you're a much better business. What's the disconnect?
[12:09] Thomas Peterffy:
I tell you, that has a history of it, too. When we went public in 2007, we didn't go to a bulge bracket firm like Robinhood went to Goldman, right? We went to a little firm called Hembrecht because they had an auction.
So, the way they took a company public is that they auctioned off the shares. So, while the bulge bracket firms generally charge about 7 percent to take a share, a firm public. Hambrick charged us 0.3%. So, but, on the opposite, the trade off was that we wouldn't have any analysts. So, the first analyst that started to follow us was Richard Repetto from Parker Sandler.
And today he's no longer working at Piper, but he's a Director of Interactive Brokers. He's on our board, but he was the first analyst that started to follow us. And as the firm started to grow, other analysts picked us up. But still, we don't have a lot. Since we didn't go public with analysts, we basically were blackballed by the Wall Street firms.
[13:33] Jonathan Boyar:
It's amazing that they would do that because they're supposed to be looking for ideas for their clients, not necessarily investment banking revenue.
[13:42] Thomas Peterffy:
Yeah, but I mean, rightfully, investment banking is part of their business, so they have to make a living, and they have the usual process of bringing in a company that wants to go public, they create research on the company, and they go around with the company to institutional investors, and they introduce the company to their contacts, and that is the general way of going public, and that's what they charge the 7 percent for. But we just thought that, why would we pay that much money? Because when we went public, we basically took 10 percent of Interactive Brokers public, and that it was a 1.2 billion offering. And so, 7 percent of that would have been 84 million. And I always thought, why pay that much?
[14:39] Jonathan Boyar:
No, it's real money.
So, you have a lot of different areas where Interactive Brokers could grow either with hedge funds, bigger hedge funds, registered investment advisors. Where do you see the biggest opportunity?
[14:55] Thomas Peterffy:
So, when we started Interactive Brokers, all of our colleagues, other market makers on the floor needed to have an electronic way of trading because suddenly all the exchanges started to go electronic, right?
So, we originally created our platform for on-floor market makers who had to not trade electronically. So that's why our platform is still so professional, it's made for professionals, right? And then we sort of started to add other features to it that didn't require all that much knowledge, but basically, we kept up the professional nature of the platform.
And so, that, makes us attractive to traders and investors who are professional investors. And although we have added some retail features to it. So we are not in a situation where on the one hand, we compete with retail brokers. And on the other hand, we compete with the institutional brokers, the investment banks like Morgan Stanley on the one hand, and Goldman Sachs and UBS, and on the other we have the Schwab's and Robinhood and Fidelity.
So, we are in between these two types of firms. So, people who do not want to spend all the money that bulge bracket firms require, and who want, who are not also somewhat, many of them are afraid of being frontrunner. By this, uh, but want more sophistication. Then what the retail brokers offer. So those are our customers.
And as people become more and more educated in the financial arena, they tend to come to us. And in addition to that, we offer this platform all over the world. And both of these two competing groups are basically focused in the United States. So, the market is very, very open for us anywhere else in the world, in Europe and Asia, Australia, Africa, everywhere.
So that's where the bulk of our growth today is coming from. Because they have no competition there.
[17:39] Jonathan Boyar:
Are you worried in those areas right now payment for order flow is illegal in a lot of those areas and that enables companies to allow quote unquote free trading? It's not really free as you know.
[17:52] Thomas Peterffy:
Yeah, but I mean the type of people who we cater to are sophisticated and they understand that no commission doesn't make it free—It means just the commission is built into the execution price.
[18:08] Jonathan Boyar:
There could potentially be a new administration coming in November, or I guess January would be inauguration. Does it matter to you who's the president?
[00:18:20] Thomas Peterffy:
Well, from the point of view of the business, it matters a little bit because when there is less regulation business is usually doing better and the economy is doing somewhat better, but I really can't complain because the economy is doing very well right now, right? So, no, as a business matter, it really doesn't matter to me on the short run. On the long run, of course, as I said earlier at the beginning of this interview, I'm a great proponent of the free market economy.
And I don't like a situation where there is a very activist government that has its fingers in everything, in all businesses. That generally doesn't bode well for the future. I don't think.
[19:16] Jonathan Boyar:
So, I mean, you have built an amazing firm, one of the clear leaders in its field, where do you see it going from here?
Are there going to be new services that you're going to be offering? Could you ever go into asset management or other adjacent fields?
[19:34] Thomas Peterffy:
We will not go into asset management because we do not want to compete with the asset managers who are our customers. So many firms have done. I think they made an error when they did that, such as Fidelity and Schwab have their own asset management and have their own RIAs on their platform who are employees of the firms. So as a result, many independent RIAs see Schaub and Fidelity as competitors while they are also on their platform. So, I think that this, we will not compete with them and so many of them I think will come to our platform. I think that the growth ahead of us is huge because as I said, in the United States, we are in between the retail brokers and the bulge bracket firms and there is a large sophisticated and growing customer base that wants our type of service and outside of the United States worldwide, we have practically no competition, so we are going to just keep making our platform better and better and more sophisticated, adding more and more products to it.
So, as we go along, currently, uh, we have about 160 exchanges on our platform, 27 different currencies. We're going to continue to add other new exchanges, other new currencies, other new products, and that's how we are going to keep growing. I think we'll have tens of millions of customers in the very near future.
[21:27] Jonathan Boyar:
A few years ago, you stepped down as CEO, I think on your 75th birthday. So, it was your birthday present to yourself?
[21:35] Thomas Peterffy:
It was not a present, but I just wanted to make sure that I'm not growing too old and too silly. So, I wanted a more capable person to run the business that I was becoming as I was growing older.
[21:51] Jonathan Boyar:
I mean, you're Chairman now, do you see yourself ever stepping aside or you want to do this forever?
[21:57] Thomas Peterffy:
Well, as long as I have my wits about me, I will continue to do this. I have a wonderful life. It's very interesting. I wake up happy every morning looking forward to my daily job.
[22:10] Jonathan Boyar:
Yeah, that's what I wanted to ask you. You clearly don't need to do this anymore. You live in Florida; you can have a lovely life. What keeps you motivated and wanting to work every day?
[22:20] Thomas Peterffy:
I couldn't imagine anything more interesting, anything more fun. But, if you look into it, I mean, people who found their own businesses tend to work forever. I think a business where the owner sells out probably sells out because he's not as successful as he would like to be.
And he says, well, I rather play golf then run my business. That is not my situation. I cannot imagine anything more fun than building and growing a business and building and growing the platform. My life is just very, very wonderful.
[23:04] Jonathan Boyar:
That's a great way to end this and Thomas, thank you for joining us in the World According to Boyar podcast.
I really enjoy hearing your story from coming here from Hungary in the 1960s to helping inspire
Thomas Peterffy:
65.
Jonathan Boyar:
1965. To helping inspire Trading Places to the great company that you built, it's just a wonderful story that I think so many people can learn from. And thank you for joining us.
I hope you enjoyed the show. To be sure you never miss another World According to Boyar episode, please follow us on Twitter @boyarvalue. Until next time.
Important Disclosures. The information herein is provided by Boyar’s Intrinsic Value Research LLC (“Boyar Research”) and: (a) is for general, informational purposes only; (b) is not tailored to the specific investment needs of any specific person or entity; and (c) should not be construed as investment advice. Boyar Research does not offer investment advisory services and is not an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) or any other regulatory body. Any opinions expressed herein represent current opinions of Boyar Research only, and no representation is made with respect to the accuracy, completeness or timeliness of the information herein. Boyar Research assumes no obligation to update or revise such information. In addition, certain information herein has been provided by and/or is based on third party sources, and, although Boyar Research believes this information to be reliable, Boyar Research has not independently verified such information and is not responsible for third-party errors. You should not assume that any investment discussed herein will be profitable or that any investment decisions in the future will be profitable. Investing in securities involves risk, including the possible loss of principal. Important Information: Past performance does not guarantee future results. Clients of an affiliate of Boyar Research and employees of Boyar Research own shares in Interactive Brokers.
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