The Disciplined Investor is all about you, your money, and the markets. Sit back and get ready for this edition of the Disciplined Investor podcast. This episode of The Disciplined Investor is sponsored by Horowitz & Company. If you're looking for a portfolio manager, look no further. Horowitz & Company. From seed through harvest, cultivating financial success.
Oil's big move, one for the record books. Markets in and out of panic. So far, not too worse for wear. Inflation numbers are out. I don't think anybody cares. And our special guest today is Thomas Peterffy, chairman and founder of Interactive Brokers. All this and much more on episode number 964 of the Disciplined Investor podcast.
And welcome to the Disciplined Investor. Welcome to the podcast that is here for you to learn, explore, and hopefully make some sense out of the crazy things that we call investing and the markets. I'm Andrew Horowitz, your host here in the chair since back in 2007. One of the earliest podcasts and I think now the longest running independent financial podcast out there. And over the years, it's been a long time we've been doing this. We've been faced with some crazy things that are going on, right? I mean, all the way back to the challenges that you and I have seen like the financial collapse of 2008-09. We had COVID shutdowns. Remember that? That was just a couple days ago, it seems. We had this massive inflation in '21-'22. And each time that something happens, it seems like, wow, it's never going to be good. And this is the worst ever that I've ever seen. Never before have we seen anything like this. And markets react and then all of a sudden it's like, well, nothing happened. We look back, we're like, well, that was bad, but if we were smart about it, if we were disciplined, we made it through pretty well, didn't we? And why is this? Why does this happen? Why is it that markets have a short-term memory when things like that happen when it's feeling really bad, but then all of a sudden we jump? Because mostly not a lot of really really bad was allowed to happen. Sure, we can concede. I can see, listen, 2008-2009 was the worst of it. Banks were failing. People were losing their houses. It was horrible. But the government stepped in and did whatever they could do to generate a better outcome. And we saw the same thing happen in COVID. Money was splashed along the streets basically when the entire world was shut down because it's not allowed to happen. And what I mean by happen is I mean a deep correction that lasts a long time like we saw in the 70s, like we saw in the beginning of the 2000s, a recession that painfully resets the system like the old days, like we saw back, I don't know, the 30s. There was a bunch of them in the 60s, 70s. This is no longer allowed in our current economic environment. The Fed has taken the side of, well, we have the ability, we have the tools to do things like quantitative easing, creating money out of thin air, and we're going to do what we can to make sure that nobody feels extraordinary pain. When I say nobody, yes, there are people that are going to get hurt. But when I talk about the markets and the people invested, that's where they want to protect because anytime anything goes sideways to down, the government steps in with schemes that eventually are going to end up in higher debt like we have record debt loads, floods of money in the economy. And it's not just here. The lessons that were learned with this quantitative easing, with this modern monetary policy and modern monetary theory is spread all over the world. Central banks with lower rates creating money, government spends, and what happens? That money particularly finds its way into risk assets. There's nothing new here, just what's going on. And then we have to ask ourselves, is this time different? Oil skyrocketing, the VIX hitting above 30 for a minute there. Stocks have been under pressure. And in the past, there's been no better way to foretell a recession and market corrections and bear markets, etc., than incredible oil spikes. But it feels like this time there's a need to end this quickly, especially before the midterms. That's going to be a big issue, which is why we're hearing things like the war has reached its objective, the war is complete, and in a way, it's kind of sounding like mission accomplished that we know didn't really end well into that one. And what we're watching now is if the whole thing just turns off just as fast as it turned on, if we can get this to subside somehow, I think it'll be kind of a short-term blip for business and then back to business as usual. But that's a big, big if. You can see there's still a lot of money that's flowing into the system and buyers really keep on stepping in anytime they see any inkling of any good news and that says a lot. Yes, we're in a downtrend. No question about it. I can't even for a moment think about any other classical downtrend that can't be recognized such as what we're in right now. And it started way before this war. There was a lot of things happening in the market specifically with technology that was a bit of a tell. Of course, the oil spike spread itself through the rest of the market. So, we are in a downtrend of sorts, but let's also recognize that the latest move has been situational and that's much different than something that is economic. Now, this could spread to an economic circumstance. That's what everybody's really concerned about. That's why the markets are readjusting and revaluing because if it does last for a while, well, all bets are off. If it clears soon, yeah, things will be kind of okay. So, like I said, I've seen plenty of these types of conditions. And what worries me now is not the war footing that we're having right now. More so, there's other market structures like private credit that is also happening at the same time. The funny dealings in the tech world that we've been discussing that I think are far more important for us to understand right now and we're going to continue to explore this. Keep your eyes on the news flow even the smallest of small items like dating of money that we saw a couple days ago and throughout the week on private credit in particular that could, I think, unravel. People are going to get pretty nervous because not only do we have the private credit situation going on now we have this oil spike and that is going to be problematic that could unravel if this conflict is elongated. So, that's something that really concerns me right now. So, let's keep an eye on that. I want to get to our guest because I'm sure he has some great insights. Our guest today is Thomas Peterffy. He's the chairman and founder of Interactive Brokers Group, which is a global electronic brokerage firm. He has been at the forefront of applying computer technology to automated trading and brokerage processes since soon after he immigrated here from Hungary to the United States in 1965. Today, Interactive Brokers is one of the largest publicly traded electronic brokerages with market value of over a hundred billion dollars. And the firm provides direct access to trade executions, clearing and custodial services for a wide variety of products, including stocks and options, forex, futures, bonds, CFDs, and funds, and over 170 markets and in over 29 currencies around the world. Wow, pretty impressive. Let's get to it. So Thomas Peterffy, how are you? Welcome to the show.
I'm very well, thank you very much and thank you for having me.
Yeah. I want to get an understanding of who you are first before we get into some of the nitty-gritty about some of the things your company's doing and how you built this I would call a magnificent company. So, here's some of the things that I have. Tell me where I've either gone wrong or whatever. So, you were born, this is my understanding, in the basement of a Budapest hospital during a Russian air raid in World War II, right?
That is correct. Although I'm not sure if the area was Russian or American, but I don't know which.
But either way, there was something going on in the background.
Right. Could have been. Right. So, here's the start of your life. You're born under bombs. You grew up under socialism. And you ended up building the machinery that replaced trading floors. And I was thinking about this and I was wondering if you see your life's work as basically one successful challenge to disorder.
Well, yes. You see, I'm not a very tall person. So when I went on to the floor of the stock exchange, I was surrounded by these huge guys and everybody, you know, had a louder voice and of course they didn't have an accent. Nobody could understand me. So I was thinking that, you know, if we could do this with a computer, it would be a lot easier for me, right? And for everybody else also because you see the way it was organized is that the specialists had to keep track of who was bidding what for which options and what price they were offering it. And you know, as you know, there are maybe 20, 30, in those days 20, 30 different options on an underlying stock and maybe five to 10 people in a crowd. So it was impossible for the specialist to keep track of who was bidding and offering what. So even though the rules called for that, that's not how it actually took place. Right? So you know, the specialist would call out a price and then people who wanted to participate put up their hands and if the specialist liked the price for himself then he gave very little to the people who wanted to participate and when he didn't like the price he gave it all to them.
So, you grew up in socialist Hungary where you didn't have access to free market literature, right? My understanding is what shaped your early thoughts were, I guess, pre-World War II novels like Dickens and Balzac and not traditional economic texts, right?
That's absolutely correct. I didn't know anything about economics except from what I learned maybe from Zola because Zola, one of the French writers, had several books on the French stock exchange in the late 1800s. So that was interesting.
So do you think that modern finance as we know it today is missing the human side of the markets? The human side of what you learned were more of a humanistic standpoint regarding the economics rather than just textbook economics. Am I wrong about that?
Well, you know, practice always helps. I basically learned most of what I have done by doing it, not by reading about it.
Right, right. That's true. So I don't, you know, I don't even have a college degree to be frankly.
And is that something that has bothered you? You've built yourself into... It hasn't bothered me in the last 30 years, but it has bothered me in the preceding 50 years because I mean, preceding, you know, it didn't bother me when I was a baby. But, you know, since I've been in my 20s all the way up until I became successful, it bothered me because I knew that if I would fail, then I would have nothing to fall back on.
Yeah. Well, we have that. By the way, you and I have that together. I don't have a college degree either. So, I guess there's a point though, you can be successful if you study, learn, stick to it, and you have a discipline, right? And then you can do something. I wouldn't suggest that somebody doesn't go to college but that doesn't mean that you are prohibited from being a success by the way.
Right. You're absolutely right but the fact is that lately people have woken up to the fact that it is not as important as it was made out to be 10, 20 years ago. So people would not hire anybody without a degree. And I mean even probably today it's difficult to get a job without a degree.
Yeah. So you own over, this is I found this out. I was a little bit taken back by this. Over 560,000 acres primarily in Florida of land. That is unbelievable. Now I think that's fascinating because you didn't accumulate yachts. You became one of the biggest land owners in the USA with all that you've done that you built. You know, you built one of the most automated trading firms in the world. Are you automating your farmland?
Well, you see, if I spent a lot of time thinking about what goes on there, I would. But, you know, I just have to focus on Interactive Brokers. So, I do not spend my time figuring out how to manage it the best possible way. But if I did, I would.
What's also great about, I think, your firm is that you had people that were very loyal to you and that worked with you for years and that helped build. Steve Sanders as an example who recently retired. Great guy. I got to know him over the years. These are just people that really were dedicated to it. And is that what's part of the culture at Interactive Brokers that helped build a team like that?
Well, you know, my management style was letting people do what they wanted to do and see what they were the best at. So, you know, they could succeed and when they were successful, I let them move into the jobs they basically wanted to do. So, it was all up to them. And as long as you have some control over that, it works very well. Also many of the people became very wealthy because the company was successful and everybody got stock every year. So they all accumulated and so that's easy to do when the company is successful. It's much more difficult I would think if the company is not successful.
Yeah. So let's fast forward into how you built this because I think it's just fascinating. So in the 1980s before laptops, you built custom handheld computers so your traders could price options faster than the competitors on the exchange floor. Right.
So, in fact, I hear that you hid the handhelds in a briefcase because computers were banned on the trading floor because traders feared automation.
Well, you know, it... so on some like the CBOE, we were not allowed to use the handhelds. Of course, we were not able to use them. So, putting them in the briefcase didn't help because we couldn't use it when it was in the briefcase. So we were just told that no you cannot use it. So I sued them, they sued me and so we had all kinds of legal wranglings over the years.
And was it because of the wireless part of it or because of the handheld?
Well, basically the people who didn't want to have their competitors use aids that help them to become better and make a tighter, narrower market. They didn't like it because it had nothing to do with the wire that they could have objected to. They would have objected to.
Yeah. Because I heard there's some story about once upon a time you, there was something about a wire down the sleeve of your coat or something like that. Some weird story.
No, they have cut many times cut our wires. You know, we, communication wires. Right. And they just cut it with a plier.
And this was because what was that? Was it because they were so afraid?
No. But why didn't they want it? It would seem like this was good for all sides. Was it because they didn't want tighter spreads to kill the commission?
No. Because they couldn't make equally tight spread. So they didn't want to be competed out of business, right? Which they eventually were, right?
But does any of this ring true with you with kind of the worry about AI these days? Is there a similarity between the two times?
I don't see the big opposition to AI. I find it surprising that not more people seem to be vocally opposed to it. Like the software companies that spent many, many years building up their software now see that AI can do the same thing in a much shorter period of time but they, I mean, no, they don't come out to oppose it as they did in those days. I mean, you know, unions in those days were much more vocal.
So, one of the things about all this that I think is really interesting that back in 1990, kind of moving through the 80s where you created these machines and back in 1980 you declared I think to the point that open outcry, which a lot of people probably don't remember what that is, but open outcry trading would disappear and that at that time I think it was considered like heresy, right? Could you first explain what open outcry was back in the day and kind of why you thought this?
So open cry is when you had to cry out the order you had or the bid you had or the offer you had. It was all done by voice, people in a crowd by voice making agreements with each other. Right. And then use hand signals like a palm out, palm in. The clerk signaled to the broker and the broker then did the trade and he signaled back the execution. So yes, the brokers used hand signals with the clerks. The traders and market makers were of course on their own and then there were brokers who were also trading for themselves and they used hand signals when they were trading for customers and they did it on their own when they were trading for themselves.
Did you, do you think at that point were you, you know, this is kind of about people that have succeeded to the level that you've succeeded. You have to have a belief that is pretty strong and unwavering, right? A lot of people have beliefs but it's like their belief can change very quickly with just one person saying well that's not going to happen or some argument that seems to really be stiff enough to make them change their mind. But were you so, part of your success was it so that you had such a belief in your outlook like that open outcry would disappear and that the exchange floors would be?
I still do. I still believe that in a free market economy, competition is good and the person who provides the best service wins the competition. Right? So the broker that provides the really best execution, best execution is relative to better than other brokers' execution, is still better. Right. And so your clients tend to do better when you give them the best prices. Right. And so that's why I have never gone along with selling the order flow to somebody else to execute it against themselves.
So that's been a big issue of yours is payment for order flow which a number of years ago was a big thing where basically you'd have faster machines grabbing the orders, you'd sell it, you buy back.
It's still a big thing. I mean it's still, most brokers still sell the orders. All the brokers I know sell the orders except us.
And that is, it's interesting because there's a lot of rules about best execution and I've always wondered how payments for order flow fit into that.
Okay, but best execution has become a name for executing a trade within the best visible bid and best visible offer. But that doesn't mean that it is the best possible price because you know the bid and offer can be kind of wide and the best price within that bid and offer is important. So especially in options, so you say option market sometimes three, four cents wide, right? Maybe five cents wide. So if you can execute it in the middle that makes a big difference. So if you trade only one or two times a year, it doesn't matter. But if you trade frequently, it makes all the difference in your performance.
And I know some, by the way, not unmentioned, you know the names that you can only bid within five-cent increments still on options. There's no, you can't grab in between.
Which is awful. You know what happened to the penny spreads on things.
Yeah, but that's not really true. I mean it's true. That's how you're supposed to quote them. But you can execute in between. So we execute in between the best.
No, I know you do. No, I know you do. Yeah. So I'm just saying that's an important issue that people don't look at, you know, they look at, well, it's a free trade or I don't have to pay anything and they think that's the best.
Yeah. They think if they pay no commission, they are ahead. But the commission is a small fraction of what they lose on the trade.
Right. Right. So, you continually innovate. You have this great team that you put together. We're going to get into some of the different products and all that and things that you really have just jumped ahead of others. What still feels broken to you in the global markets?
Yeah. Just generally speaking the global markets. I mean, it could be anything in there, but what's kind of still a broken part that you know, you would like to fix like you have for so many other things over your career?
Well, you know, I still would like to see more competition than there is. I would like to see of course more interesting products and I would like to see less useless regulation. There is a lot of regulation that basically doesn't lead to anything. It just makes it more difficult to conduct the business and puts a lot of expenses on the people who do the business and then they have to pass that on to their clients and that is a big problem because markets would be much more efficient without all that regulation.
Now you, as at IB, you've intentionally limited leverage, right? You enforce very strictly margin rules, restrict certain client behaviors. As a matter of fact, I don't know exactly what happened in your circumstance. I know there's other firms back, do you remember when oil went below zero back in the...
Yeah. Went to minus 20 something?
Yeah. And that was kind of a crazy moment. People were pulling their hair out, freaking out. There were brokers that didn't properly do what they needed to do to manage their margin and all.
We lost a lot of money in that. Yes.
But you do a really good job. My understanding is about restricting certain let's just say bad client behaviors, right? You just don't let...
It's not, you see that's regulation. So that we are compelled by regulation to survey our clients against manipulative trading. And for example, so I'm not sure if I agree with this, but the rule is that you cannot, for example, bid up the price of an item and then suddenly turn around and sell it. That's called manipulative behavior. But in my mind, as long as you bid it up electronically and anybody can come in and sell it to you, if he's quicker than when you turn around and sell it to the other guy, I think that should be okay. But they say no, it's not. So, you know, I don't want to argue with them, but that's the rule and we have to enforce it, right?
That's like saying that a baseball pitcher can't throw a curveball.
That's right. [laughter] Right. That's right. You have to throw it down the middle every time and make it fair.
You have to be forthright about what you want to do.
Right. So that's crazy that if as long as there's a... That's the rule. That's the rule.
Yeah. Yeah. You've also emphasized that Interactive Brokers' low cost comes from I think a company-wide discipline. So many firms out there want your cost discipline, but I don't think I'd be hard-pressed to find anybody that could pretty much replicate it. And so I guess my question to you is because it cost you a lot of money to get to that point, right, where you can provide low cost. Is that why it's so hard for other people to try to replicate that model? They just don't want to deal with the fact that they're going to have to suffer for a while till they get to the point they need to be.
Yeah. It's years and years of building very efficient systems. Constantly.
Which puts a moat around, which puts a great moat around you.
That's what is the mode, right? But maybe it will not last long because supposedly AI can do all this in a minute. It's going to take us all out.
It's going to take us all out.
So, just a couple of things that I really dug into and was thinking about because, like I said, I have been a client of Interactive Brokers for a decade at least. And I've seen an incredible amount of changes over that time and it just keeps getting better and better. You know, extreme automation, minimal advertising. All this, by the way, I view as a client as a way that makes sure that I'm not going to get poked with some crazy fees or a problem with the company. That's how I look at it, right, from the client side. So I think that's great and I thank you for that, by the way.
Yeah. No, and I think and also all these incentives that are tied to efficiency instead of growth optics. And that's also where you've been over the years where I think you've enforced this internally. It comes out in your earnings, last earnings I think from the fourth quarter 2025 business highlights. Just a few things I'm going to throw out there. Right. So you reported a 22% rise in commission revenue to 582 million, increase in consumer trading volumes across options, futures, stocks. Total equity reached about 20 and a half billion. You saw customer accounts increased 32% to 4.4 million. DARTs, daily activity, increased 30% to 4.04 million. Credits increased dramatically. Margin loan increased dramatically. Is this not a one-off? I know that it's been a lifelong process for you.
That is correct. So generally every year is better than the previous one. And it's been a long time since that has not been the case.
No, it's been great. So, some of the things that you set up, Forecast Trader, that's something big that you really went into very strongly and you have a big belief in. Can you kind of just give me and the listeners a little bit... well I remember when that was coming out by the way. I remember because I was right there and there was a lot of discussion about it and it was like hey we have something coming. We may be doing this. We got to get approval for this. I think it was right before the presidential election, wasn't it? Is that when it was? It was somewhere around there. Forecasting.
Which presidential election?
I don't remember. But I just remember that from my... I'm just remembering that. But these prediction markets, right? They become pretty big. Some of the polling companies are even leaving the market entirely now as well.
Yeah. And that certainly, I mean at this election you will see that the prediction markets will be well ahead of the polls and that actually happened in the last election also. I mean, the prediction markets were very firmly convinced which way the election is going to come out. And so the Republican win was much more likely in the election markets than according to the polls.
I mean, with the elections, it seems it's free from... well, people are putting where their money where their mouths are. I'm sure that if there's anybody that wants to put extra on there or whatever for whatever reason, but the difference is we don't... right now, you see, it's interesting because the house seems to... the election markets are convinced that the house is going Democratic so much so that you can for 19 cents you can get a dollar if the Republicans get to keep the house. So, it's very unlikely that they will keep it because you can get five to one on that if they do.
That was like the recent which I was so aggravated I didn't grab this one when Hassett was the lead. Remember that? And he was like 90 or 80 to 20 that Hassett was going to become the Fed chair. Well, but you know, and that he was going to be picked whatever. I'm like, 'Oh, that seems like this president, he moves around a lot. I should really go the other side of this one.'
