I think if you think about how you want to invest your assets for your heirs to have something down the road if these things happen that I'm worried about, then I think land is the logical asset. I think the Fed will probably raise rates, although as I said, I would not be in favor of that, but they will have to do it just to demonstrate that they are independent. Slowing down, I mean, it is a very difficult thing because China is not going to slow down. So, you know, this is basically a competition between the two hemispheres and it's not... No, I am not in favor of slowing down. I would like us to win.
Welcome to the Master Investor podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, an edge. The Master Investor podcast is sponsored by LSEG, Interactive Brokers, the World Gold Council, and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. My guest today is a titan of markets, a digital trading pioneer who founded Interactive Brokers in 1978 and built it to sit at a market cap of $160 billion today. The performance in recent years in particular has been astonishing. Shares have risen over 40% per annum for the last 5 years. Thomas still owns 75% of the company and therefore is worth over a hundred billion dollars himself. IBKR, Interactive Brokers, is one of the four sponsors of this podcast. I'm proud to say I am delighted to welcome back the chairman of Interactive Brokers, Thomas Peterffy. Thomas, great to see you.
Thank you, Wilfred. Great to see you, too.
And you know, I should point people because I was tempted because it's been a year, year and a half since you last joined the podcast to recap your life story because it is so fascinating. But rather than doing a repeat episode, I would point people back to our first conversation just over a year ago for that. And Thomas, I wanted to just start on a theme that has continued since then, and that is the amazing share price performance, which comes from an amazing underlying earnings performance, 40% per year earnings growth from 2022. What's driven that?
Well, it's basically what IBKR is all about. So when we started the brokerage business some 33 years ago, we did that with the idea of providing a platform to floor traders on the various equities and options and commodities exchanges to continue their business as the floors go electronic. Now, we were clearly way too early because the trading floors did not go electronic for another 10 years. Conversions happened between the year 2000 and 2010, and that was the time when we began onboarding our first target customers. So these were people with capital from half a million to $5 million, and they conducted a regular daily trading business. So our platform had to be very different than any other brokerage platform at the time, which were basically giving their customers order tickets to fill out. We had to provide a system for our customers to manage several limit orders at the same time on different products. We had to enable them to do arbitrage and pair trading and shorting and all that professional traders regularly used to do. We had to obviously provide the best possible execution prices, low financing rates, high rates of interest on temporarily available cash, interest on short proceeds, and all the features that these traders needed to make a regular income on a daily basis.
As this business started to take off, we made our platform available to everybody else who could find us on the internet. And that included larger professional investors and hedge funds with substantially greater levels of capital and retail clients with much less capital. But the focus remained on the professional trader, and that is still our target client today, and they are the ones whose evolving needs we try to satisfy as we serve them in more and more countries around the world. So that is the reason we can say that the more investors know about the ins and outs of the mechanics of investing, the more people realize that in order to maximize their returns, it is not enough to pick the right investment strategy, but they also must pick the right platform to implement it. That is what drives our growth.
I wanted to talk, Thomas, about two big themes, interest rates and AI, over the next sort of section of the conversation. First on interest rates, because clearly a big reason why your earnings have been so strong in the last four or five years is because your net interest income has risen as interest rates came off the floor for the first time in a decade. And clearly the market's grappling now with the prospect of whether rates are going to go higher still, possibly tomorrow with Kevin Walsh hosting a Fed meeting.
So for us, it's not so much about how high interest rates go because we basically, you know, we lend money half over prime and we pay, not prime, I mean Fed funds, and we pay interest half under Fed funds. So we don't care if Fed funds are 5% or 10% or 20% or 1%. So, but whether the Fed should raise interest rates tomorrow is a difficult question, and it's because in my mind inflation is driven by oil prices, and that high oil prices are caused by the war. So stifling Iran's ability to attack the Strait of Hormuz is much more important to reduce inflation than to raise interest rates. And the bond market's calling for raising the rates, but I'm unsure how important that is. It may be better to run a hotter economy while we are still fighting the war so that we can easier cope with unfavorable economic fallouts. And when the war is over, we can see if lower oil prices immediately result in lower inflation or if we must raise rates at that time.
Right. Clearly the longer end of the bond market at the moment is really flashing red. You know, 5% on the 10-year just crossed higher still for the 30-year, and it's a global issue. How concerned are you about that? And does that trump the economic argument you're making? Does the Fed need to try and calm the bond market with a hike?
Well, I think the Fed will probably raise rates, although as I said, I would not be in favor of that, but they will have to do it just to demonstrate that they are independent.
Are you worried about the bond market at the moment, the pace of increasing yields?
No, I'm not. No, I'm not really. I mean, you know, increasing, it's fine. Rates, you know, they can go anywhere. I mean, it's okay from my point of view.
And you don't think it's going to, I guess, increase the chance of either a recession in the underlying economy or a big correction in the stock market?
Well, if they rise very, very sharply suddenly, then that could cause all kinds of problems. But as long as it's gradually going up as it is currently, it's okay with me.
And the last few weeks since say August, you think it is still gradual, the increase in yields?
And that's what I think. Yeah.
This episode is sponsored by the World Gold Council, the global experts on gold. They champion gold as a trusted strategic asset, provide market-leading research to help investors understand gold's role, and modernize how gold is owned, traded, and used, developing industry standards and market infrastructure. Learn more at goldhub.com. In terms of the other kind of big exposure, of course, to your very strong earnings growth the last four or five years, I think it's fair to say it's been a strong equity market, which is, you know, obviously something that boosts the overall momentum of your business. Do you fear about again the scale to which a single theme behind the equity markets, AI, is going to be hard to continue for the next 5 years in the same way as it has the last 5 years?
So I wouldn't worry about that either because, you know, even though valuations are very high from a historical perspective, if you look at the rates at which earnings are growing, and they are not high, as a matter of fact, they may be even too low. So if you look at a company like Nvidia, 27 times earnings, and they stated expectations of increasing earnings by 70%, that is a relatively low valuation. And a similar situation to a lesser extent is what we can expect everywhere else as AI permeates the economy. So it's not necessarily a focus on AI only. It's the use of AI with all other companies that will really drastically increase productivity and earnings. And even if the frontier models would stop progressing at this moment, there are so many open-source models all over the place, and adopting them by all the other companies will result in huge increases in earnings and productivity. So I'm basically very optimistic.
And what about the big AI directly related companies, the hyperscalers and the like, and the scale of investment they made in recent years? Thomas, you're quite famous in the business, which Wall Street has always celebrated for not wanting to waste money, to being very careful with the money you invest and making sure the return on capital is attractive. Do you think they've been foolhardy with some of their investments?
Well, I mean, you know, it's an interesting situation because, you know, their idea is that there'll be only one or two of them who will basically prevail, right? But in order to be among the one or two winners, they basically have to buy all the compute capacity they can. So at this point, none of them are willing to give up on not being number one, right? So they have to keep buying compute, and that eventually will contract the price of compute. So it basically is going to benefit tremendously everybody else, and these companies, of course, will have to write down much of the compute that they bought.
And when you see the actions of the last week or so and the CEOs of these companies coming out to call for regulation, what's your assessment of that as someone that's built and sits atop a big business? Is it understandable to you to say we want to slow down? We want to welcome regulation. Do you think that's a kind of...
Regulation is one thing, but slowing down? I mean, this is a very difficult thing because China is not going to slow down. So, you know, this is basically a competition between the two hemispheres and it's not... No, I am not in favor of slowing down. I would like us to win.
And similarly, what about the risk of a sort of Hindenburg moment as some people are referring to it, and if there was something worse than the Hugging Face hack that appeared?
I don't really believe in that. I mean, you know, hacks, they've been hacking systems for a very, very long time, and it hasn't really caused substantial problems. So.
And you're a very tech-forward business. Obviously, you've been massively ahead of the curve on all forms of trading. Do you worry about, I presume not at your business, but at a financial hacker in the financial system somewhere, or do you in fact think that companies like yourself are investing heavily in this area and well prepared for those threats?
Of course, we're continuously worrying about it and try to take all the steps that we must take to make sure that we are not going to be hacked. But I mean, you can never be 100% sure that that's not going to happen. You have to make sure that even if you do get hacked, it's not going to cause too much damage before you discover it.
This episode is brought to you by LSEG, the leading global financial markets, infrastructure, data, and analytics provider. To learn more about how LSEG connects businesses, investors, and markets worldwide, visit lseg.com. Let's talk about prediction markets, Thomas. This is something that I know you've been passionate about, but I have to say I'd underpriced the scale of how long and how passionate you've been about it. You launched your prediction markets product, ForecastEx, in 2024. You significantly increased the offering in 2025. But as I said, this was something you thought about over a decade ago and actually built a phantom prediction markets product 10 years ago.
That's right. We did that, and then we were warned that if we were really bringing it out and offered it to users, that we were at that time working on applying for a banking license, and the consultants we used, they learned about our prediction market efforts, and they warned us that if we go forward with it, we will never get a banking license. So we actually came out with it, but we came out with it with phantom money. So it wasn't real, but it was real enough for the guys at Kalshi and Polymarket to see it. And they said, 'Man, that's a great idea.' And they came out with it for real money, and so that's what happened. And so now they are way ahead of us, of course.
And when Kalshi came out, you tried to buy them.
That's right, because you see, they went to the CFTC and they got licensed, and I said, 'What a stupid thing it is, I didn't think about doing that.' And so I thought that, well, to get licensed by the CFTC would take about two and a half or 3 years. So I thought I'd rather buy them than do it myself. And I tried to buy them, but they wouldn't entertain an offer. So we went to apply for our own license, and we got it. But so they are basically, you know, most of the volume that they do is in sports, and we were never interested in sports. That wasn't our idea about prediction markets. Prediction markets to us was all about how it should interdigitate with equity and commodities trading.
And so you're focused, as you're kind of alluding to, on financial markets and where prediction markets can fill a gap for professional investors.
You're right. So in our view, the economy is the major determining factor for the stock market, right? And so the stock market and the commodity markets are only concerned with prices, and that doesn't answer all the questions about the future. Prices by themselves, you know, they are a very limited niche. So you have to understand, I mean, everybody understands that individual companies and individual commodities exist within a larger economy, and regional economies exist within the country economy, and country economies exist within the global economy, and the global economy is functioning within a social and climate environment, and all those things are basically determining how individual companies can and do progress. So these questions, I think, are very, very important from a point of view of an investor. So when you are looking at a stock and trying to figure out where that company is going, I think you have to look at the entire environment and have an idea as to what that environment is going to look like in the future for that company in order to evaluate where that company can possibly go.
How far away do you think we are, Thomas, from prediction markets being deep enough and liquid enough to genuinely represent overall consensus? I mean, I presume for a market like will there be a rate hike tomorrow, that's already the genuine consensus. It represents the genuine consensus. But what about questions? I know you offer markets on weather, for example, because it's relevant to commodities traders. Do you feel like they're deep enough and liquid enough to represent genuine consensus yet?
Not as of yet, but I think in the coming years it is going to become more and more liquid. More and more, there are more and more economic interests that are dependent on these questions and who are exposed to these questions and who would do better if they could hedge, and therefore they will pay more and more attention to these markets in the coming years, and they will participate, and these markets are going to become huge in my view.
Will it mean experts become kind of irrelevant?
No, no, they will not be irrelevant because I think they will, instead of selling their expertise to whoever they are selling it today, they will just participate in the prediction markets and express their opinion that way because it's much more efficient than... Right. They should take their own positions based on what they think, and the prediction markets will tell the world what the experts think.
It's, I guess, it's really interesting. I guess we'll see who the accurate experts are. They'll put the money where the mouth is, perhaps. I'm interested in how you run this business, part of the business, if it's not yet deep and liquid. Does that mean you are more exposed at the moment to the positions that people are taking because you can't actively offset your positions?
Yes. To the extent that we have to make a market, yes, we are more exposed, and it's not a very attractive business at the moment, but I think it will take off.
And do you think that also applies to the Kalshis of this world, or given that the higher volume for them is in areas like sports, are they deep enough and liquid enough that they are just simply making...
