Anything that doesn't fly in the face of the laws of physics can be done. You can find a way to get it done unless it's physically impossible.
Hi, I'm Emmanuel Bolari and welcome to the FundSeeder Rise podcast. Today I'm thrilled to sit down with Thomas Peterffy, a true pioneer who changed the way we trade. Born in 1944 in Budapest during a Soviet bombing raid, he grew up under communism where his family lost everything, teaching him that the only assets no one can take for granted are knowledge and reputation. In 1965, he arrived in America with $100, no English, and no network. He started as a draftsman, taught himself programming, and walked onto the trading floor in the 1970s.
1977. Okay. So, exactly 1977. And you imagine the machines and that he could trade human logic into algorithms. He later went on to found Interactive Brokers, one of the most technologically advanced brokerages in the world, pioneering electronic trading, systemizing what others thought required instinct, and really democratizing access to global markets. So Thomas, thank you so much for joining me today.
So Thomas, we were talking earlier. I was born in Romania. You were obviously born in Hungary. But one of the stories and the things that I have brought on that your parents taught you really was that knowledge and your reputation are two things that cannot be taken away. So I'm curious how that philosophy actually shaped the way you approached risk decision making and just building in general.
You know, my mother kept telling me that. I don't think it had any impact on me. [laughter] You know, I've been thinking what does that really mean? I mean it's very clear what it means but so what? I mean, you know, I always wanted to know whatever I could but I wasn't very good at learning anything.
Yeah. So that was your mother's philosophy is what you're saying about knowledge and reputation. But in many ways your path to where you're at was unorthodox. You started as an engineer. You started as a draftsman. It was a continual pursuit of learning and not necessarily even just defaulting to what you had learned. You know, how did that pathway of innovation from a learning perspective take you to where you are at today?
So, as I grew up in Hungary, there was censorship and so, you know, we couldn't have access to any contemporary books. But I was very lucky because my grandmother had a library of the classics, the English and French classics like Dickens and Balzac and Zola and Victor Hugo. So I read, you know, hundreds or thousands of those novels and that's where I basically learned about anything because otherwise there was very sparse material in Hungary available for reading anything.
So that maybe from a knowledge perspective did those early books help shape your world view?
Yeah. So, is there one book that you could think back now that over the years you could say that that book was almost like a definitive foundation for how I view the world?
No, nothing specific. No. No.
Okay. Well, you came to the US and still your pathway was definitely unorthodox. You know, for FundSeeder, you know, as you know, our concept is it doesn't really matter where you're at in the world. You don't have to be on Wall Street. You don't have to, you know, graduate from Harvard. If you do apply yourself, you have an ability to grow as a trader and potentially manage capital. But when you came to the US, you only had $100. I think your dad gave you that from what I read based on your background. And you started this pathway of building a career for yourself. So, I'm curious, do you think that sort of lack of options and just having $100 and that created sort of perspective of risk tolerance that many traders today don't experience because they've grown up with a lot of money and they have that safety net?
So yeah, I mean money at the beginning was a problem and I also wanted to get into business. So I had to whatever little money I could make I had to save to use later as capital. So what really gave me my start was at one point I learned to be a computer programmer early on because the job I had as a draftsman, the company bought a computer and they realized that nobody knew how to program it and they asked around if anybody would want to learn. And since I didn't speak English, I figured computers would be easier to learn than a language. So, I learned computer programming and that gave me a route to eventually end up on Wall Street as a computer programmer. And so, with the first money I saved, I bought a computer of my own. And then as I began to work on Wall Street in '69, somebody said to me, you know, there are all these options that people are trading over the counter and nobody knows how to price them. Maybe you could figure out how to price them. And I ran a large number of simulations on my computer and I eventually realized that it had all to do with the probabilities, the distribution function, and from that I derived my formula. But it wasn't really a formula, it was a computer program that I generated that was able to very well figure out the fair value of an option. You know, it was writing. So I ran through a lot of historical prices and my formula eventually got to the point where my errors were equally distributed on the two sides. So I had the right expected value for the options and that really enticed me to really save even more money and more money and more money. And finally by '77 I had accumulated $200,000 and I went to buy a seat on the American Stock Exchange and I became a market maker for options on the floor being the only one who had the right value for an option. So it wasn't very difficult for me to make money there.
So we'll talk about the floor experience and the market making because I think that's obviously a pivotal time not only in trading history but in your history that launched you. But I'm curious that moment of clarity that you had. I mean, you know, it was early, computers must have been early at that time. You know, what made you even think through that process to say, you know, this is nobody's doing it, everybody is, I mean obviously the status quo is everybody's calculating by the hand of their mind, like what was that moment of clarity on your side that said I'm going to attempt to use this?
It just came to me naturally. I had no other way of thinking. That was the only way I thought about it.
And was it based on your previous experience using the computer for drafting?
Yeah, I mean, you know, in surveying there are many simple routines that people use where you do simple calculations that take say 15, 20 minutes every time you have to make one. And when I was at that highway design firm, I wrote these simple programs on that computer and, you know, that cut the calculation time to say 30 seconds. I mean it was fantastic. I mean I felt terrific about it because people were lining up with their little calculation problems and I fed them in and I gave it back to them. So I was very useful. I felt really useful and that was great.
Yeah. And so I would imagine then when it came to the trading the same thing applied except now in a market where speed is a difference of making money or not making money.
Right. Yeah. Okay. So take us then through, you left, you got a seat on the floor and you went into market making. And I know one of the stories and of course tell us more in a little bit more detail because I think it'd be fascinating for our users is you were at the board, you're executing trades on a daily basis and you kind of out of boredom came up with this machine, this algorithm and then eventually obviously the famous robot that helped you launch into...
Oh that was much later. Yes. So, all right. So, you know, the idea was to keep automating everything. And so at one point we had a completely automated market making system that would take in all the prices and put out our own bids and offers everywhere. But since the exchanges were open outcry, we had to get those bids and offers to our own employees who worked on the floor and try to execute as many trades as possible on those bids and offers. And as soon as they executed one, they had to convey that back to the office into the machine and the machine adjusted the prices and gave out new bids and offers. So, and that went very well. But the NASDAQ had an automated system, a matching engine where people could sit by their terminal and type in bids and offers and the NASDAQ, you know, just like today, the NASDAQ computer matched up the bids and offers and did the trades and sent back the confirmation. So, one day we had a visit from a vice chairman of the NASDAQ who said, 'Well, you guys are trading up a storm. I wonder how you're doing it.' And he comes into the office and he says, 'But there's nobody here. What's going on here? I expected to have 20, 30 people sitting here screaming and yelling and there's nothing happening. But how do you do this?' And so I pointed at the computer and I showed him that, you know, it was just we spliced into the wire and we issued all the orders electronically. And he thinks about it and he says, 'Well, that's not acceptable because look, here is in the rule book. You're supposed to enter each order via the keyboard.' And he said, 'Look, this is unacceptable. I'll be back here in a week, and if you're not utilizing the keyboard to enter each order, you will be shut down.' So, you know, we didn't know what to do. And then eventually we came up with this idea of building a box over the keyboard that had pistons. And the pistons were driven by the computer and it typed on the keyboard with pistons. So he comes back a week later. He looks around and he says, 'Man, nothing changed here.' Now that moment the box, because it was typing extremely fast and very loud.
And he says, 'What the heck is going on here?' And I said, 'Look, we're entering each order via the keyboard. That's just as you suggested.' And that was then allowed and he allowed it. He could not say anything. I mean, there was nothing he could do about it. No. I mean, they could have changed the rules, but, you know, as far as the rules were concerned, we were in compliance. We entered each order via the keyboard.
Now, did you come up with that solution yourself? Because I would imagine if you put a hundred people in the room, 99 of them are going to probably say, well, you know, it worked for a while, but obviously we can't, we need, only one person can enter. I mean, how many people would come up with like those pistons? Was that you? Was that the people you were working with?
Well, I mean, it's unclear to me as to, you know, we were, you know, maybe two or three of us together. Unclear to me who, I don't remember who came up with that specific idea. But, you know, my determination always was that there must be a way. There always must be a way. So, as long as you know that there is a way, you can eventually, if you're sure that there is a way, then you will find it.
Yeah. And that's really good. You know, I have a 14-year-old son and a 12-year-old daughter and I think many people who are starting into trading, you know, that might have this almost just ideas or they're passionate about or they have a conviction, right? Let's just say you had a conviction that had to be a way. And I think if I look back at your career, that's been almost like a hallmark of who you are where you're not going to give up, there has to be a way. And if just because you don't see it now, it doesn't mean there's not another pathway. Like what would you, how could you tell someone who has a conviction that even though there's everybody who tells them that it's not possible to keep going? What advice would you tell, you know, the younger generation if you...
Well, anything that doesn't fly in the face of the laws of physics can be done. You can find a way to get it done unless it's physically impossible to get it done.
Yeah. Yeah, that makes sense. So, from a perspective of just because somebody has not uncovered it doesn't mean it's not possible.
And that's the idea of knowledge. So you continued on and if you could tell our audience so obviously very successful now you have these quote robots and you created a market making firm and most people today know you for Interactive Brokers but before Interactive Brokers Timber Hill was just a fantastic success story. Can you take us through that journey and how...
Yeah. So, well, you know, in the early '80s we as I mentioned before the NASDAQ example, we created this computerized system that was driven by interconnected many, many IBM PCs. They were interconnected and each one had the responsibility of calculating the prices very, very quickly for an option and constantly refreshing itself. So we had a system where we drove bid and offer markets for basically all the options that were traded in the United States and eventually also in Europe and Asia where by the way the markets were already electronic by the 1990s. So in the US that was still open outcry and we had to have people who we would send these trades to, the orders to. And that was always the biggest challenge, how to convey our bids and offers to our employees on the floors. And so at the beginning, we put it on screens that we were driving by telephonic wires. And then the problem was that they couldn't read the screens from far away because we were not allowed to put the screens in the middle of the floor. We had to have them on the edge of the floor by the wall. So they couldn't run back and forth and look at the number and run back to where the trading took place. So then we replaced the numbers with color strips and so you could, being maybe 20, 30, 40 feet away, you could look at the screen and see the color strips and each color stood for a digit. So people were able to read our bids and offers and that's how we were doing the trading and that was extremely successful. So basically, you know, when I went down on the floor in '77 I had $200,000 of savings and by 2007 when we went public we had $4 billion of retained income, all taxes were all paid. So it was $4 billion after taxes and that gave us then the capital to go public basically.
And so at one point we were able to replace these colorful screens with radio-driven handheld computers. So our employees then started to carry small handheld computers that were driven by radio waves and we could communicate directly by radio waves. So the first exchange where we were able to bring in these handheld computers was the Chicago Merc where in the S&P 500 pit we put in two people, one representing all our buy orders, one representing our sale orders. And then we had this idea that we could connect via the internet people around the world to these handheld devices. So that's when we, and they thereby got, they could interact with the other people in the pit, namely they could put in their bids and offers, look at the order book which they would see the same way as the two people standing on the floor would see, and they could trade with the crowd. And that's how everybody wherever they were, even in Asia, they could basically interact with the crowd. So that's why you called it Interactive Brokers.
So that was the natural progression from Timber Hill is eventually you saw like a much bigger opportunity of then democratizing and offering that same type of system and process to people. You know what's interesting Thomas is like just talking to you in your journey. I mean even from the draftsman and the first time you had that computer it's really all about if something can be automated or you could place a system around it and you could do it much faster then that becomes your edge. I mean is that kind of the general...
Precision is probably more important than speed.
Yeah. What? I'm sorry. What's more important?
Precision. Precision is because you see the idea was that the tighter we could make the market, the more often we were able to trade. So, we were always sacrificing profits for volume. I always believed that it's better to make a smaller amount of money on many, many, many more trades. So the profit times the trade to get the sum adds up to an ever greater amount. So because, you know, when we started in the options business the bids and offer differentials were sometimes half a dollar. It was just, and since it was so wide, the market was so wide, it was very difficult for people to make money in the markets because they had to overcome that execution expense before they could make a profit. I always believed that the smaller we can make the execution expense the more people would trade and that is actually what happened.
Yeah. You layered on top sort of the market making strategy on the brokerage industry whereas more brokerage firms probably did not look at it from that perspective and that's really what made you successful. You know, one of the questions that I do have in terms of transitioning from Timber Hill, you decide to shut it down at a certain point. And so, kind of a point that might be relevant to our listeners, like how do you make a decision to shut down something that is doing well, but perhaps is, you know, it's time to move on?
Well, the fact is that it wasn't doing that well when we shut it down. So what happened was that after the 2000 crash, other people started to realize that you could automate trading and they decided to buy order flow from the retail brokerage firms. And by that time I had Interactive Brokers and I said well I cannot, my market making operation cannot trade against my customers because that would be a conflict of interest. So I was, and I was regulatory also obliged to keep the market making operation completely separate from the customer business. Other people went and they just bought order flow and they executed it against themselves. So as a result the retail order flow basically disappeared from the exchanges and as a result our market making operation was doing less and less well. And at one point I said well, you know, we cannot continue both of these businesses, we have to go with one, which one should we go with? And I said okay let's go with the customer business and so that's how I quit the market making business.
Yeah. Was it, were competitors also coming in? I mean it was no longer, I mean, you know, the...
Competitors at that time were basically Citadel, Susquehanna, the same guys. Well, Jane Street is a new one but...
Yeah, so transition. So right now for Interactive Brokers I know it's, you have traders from a lot of countries. I don't know what the exact number is and you've expanded where I mean we have people that I've spoken to that are from the US to Hungary to Romania to, you know...
Everywhere. When you built that and even now in terms of how you're viewing the future is it, look, I just want to optimize how much money I make because that's like from an engineering perspective...
No, it's not the, no, I want to optimize how well my customers do. And this is what I'm really, really, really very, very proud of. So for 2025, the Interactive Brokers customers, the individual customers have beat the S&P by 1.3%. All of them together. And that's over a million customers. So, we took all the customers who started 2025 with $50,000 or more and we looked at where they finished the year and they were all, the S&P was up something like 16% and our customers were up 17.3%. So, the average customer beat the S&P by 1.3%. Now, the average RIA customer, registered investment advisor customer beat the S&P by 2.67%. And the big one is the average hedge fund. So, we have about, what was it? I think 2,350 hedge funds, something like that. They together beat the S&P by 11.01%.
That's a staggering number, right?
So I am extremely, I mean that's the ultimate, I couldn't have wished for anything more. That was just absolutely fantastic.
Yeah, those are actually unbelievable data that you just reported because most people when they think about retail trading, you know, it's they lose money and they churn and there's...
Yeah. And this is of course after all costs.
It's all the commissions and exchange fees are all taken out of this performance figures.
So, so it's all those things. Obviously, the smaller the transaction cost, the better you will do because, you know, you often, especially on larger orders for hedge funds who use prime brokers, their orders are front-run by the prime brokerage desk. I understand why they are not performing as well as they should. But so that's the number one thing. Very low transaction costs and obviously no trading with your customers' orders. As a matter of fact, trying to, so we have an ATS and in our ATS we encourage people to trade with market orders. So we have resting orders in our ATS and when we have many of the smaller retail orders come in we execute them in the ATS as long as the bids and offers in the ATS are better than what we can see in the marketplace.
So but that way both sides benefit.
