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2024/05
The inspiring story of Thomas Peterffy, father of high-frequency trading
Thomas Peterffy, the founder and CEO of Interactive Brokers, the largest online brokerage in the U.S., recently expressed his concerns about the inflation outlook in the United States. His remarks have stirred significant reactions within the industry.
Previously, the U.S. Department of Labor released the April Consumer Price Index (CPI) data, which greatly exceeded expectations. The CPI rose 4.2% year-on-year in April, marking the highest increase since September 2008. Excluding food and energy prices, the core CPI increased by 0.9% month-on-month, the largest rise since April 1982.
Peterffy referenced his personal experiences growing up in Hungary after World War II. He said, “Whenever I hear such data, I recall my childhood in Hungary, where I played with billion-forint banknotes that were utterly worthless.” Peterffy fears that “this is an uncontrollable situation.”
A Legendary Journey on Wall Street Began at Age 11
Peterffy’s comments garnered attention due to his influential role in the industry over the past decades. As the founder of Interactive Brokers, Peterffy is a renowned investment guru and a recipient of the Lifetime Achievement Award at the US Options Industry Conference. His personal story is equally legendary.
Born in a basement hospital in Budapest, Hungary, in 1944 during World War II, Peterffy’s childhood was marked by hunger and hardship. His family often moved at night to avoid debt collectors. In 1965, he seized the opportunity to escape Hungary, arriving in New York with no money and little English, thus beginning his legendary journey on Wall Street.
Developed an Algorithm for Pricing Options
In 1969, Peterffy joined the Mocatta Corporation, a well-known New York financial market participant, under Henry Jarecki. Peterffy thrived there, gaining Jarecki’s admiration.
In the 1970s, as U.S. futures trading volume surged, Mocatta began active participation. Through continuous study and validation, Peterffy and Jarecki identified vital factors influencing options pricing: the strike price, expiration date, volatility, and risk-free interest rate.
Peterffy spent over a year developing an algorithm that used these parameters to price options. Mocatta began using this algorithm for trading options, achieving excellent results.
Cautious Approach to Options Trading
In 1977, Peterffy started his venture. Determined to start strong on the first trading day at the American Stock Exchange, he worked 18-hour days to perfect his algorithm and create tables to guide his futures trading.
He meticulously studied companies whose futures prices seemed significantly mispriced. He made tables showing each company’s corresponding futures values at different stock prices.
During the day’s stock price fluctuations, Peterffy quickly consulted these tables to calculate the fair price of stock options and executed trades based on this price.
Initially, Peterffy was very cautious with options trading, relying entirely on his algorithm’s pricing. He refused to trade if an options contract fell outside his conservative profit range.
However, he once found a DuPont option trading at $31 while his model valued it at $22. Believing he had seen a great opportunity, he sold 200 call options, expecting the price to drop.
Unexpectedly, the company announced better-than-expected quarterly results, causing the stock price to soar. Peterffy lost $100,000, a devastating blow for a young trader with only $160,000 in savings. This experience led him to vow never to engage in directional trading again, focusing solely on hedged trades.
Pioneer of Automated Trading in Options
Determined not to be defeated by this loss, Peterffy slowly rebuilt his funds, expanded his trading team, and increased trading volume. He pioneered automated trading through computation in options, continuously researching and refining his strategies. His trading profits began to skyrocket.
In 1990, Peterffy renamed his company Interactive Brokers. On May 4, 2007, Interactive Brokers went public on NASDAQ. With the opening bell, his company was valued at $12 billion, becoming the second-largest IPO in the US that year. In 2012, Peterffy ranked 77th on the Forbes US list with a net worth of $4.6 billion.
Peterffy is a pioneer of programmatic trading in options. Today, 60% of trades are executed by computers with minimal or no real-time supervision. Peterffy’s story on Wall Street is unique; his distinction lies in being an exceptional programmer.
Using his programming skills, mathematical knowledge, and ability to write complex code, he created layered algorithms that revolutionized an unfamiliar field: Wall Street trading.
