COVER STORY

Peterffy: He’s madea career ridingagainst the wind

By Suzanne McGee

J o h n M a d e r e

How a stubborn, pennilessrefugee deﬁed Wall Street’sconventional wisdomto become a self-madebillionaire — and a drivingforce behind the automationof global securities trading.Is a Refco takeover next?

ABREEDAPARTABREEDAPART

On a small table in Thomas Peterffy’s office stands a bronze statuette: Salvador Dalí’s rendition of Alice in Wonderland, the bemused literary invention of Lewis Carroll. The founder of Interactive Brokers Groupcame across the sculpture while traveling in Italy three years ago and immediately identified with it. ToPeterffy, a computer programmer who has spent most of his life ﬁghting to modernize securities trading, WallStreet has often resembled an upside-down world where people foolishly and inexplicably clingto the status

quo rather than embrace common sense innovations.“On Wall Street I feel like I am Alice in Wonderland,”chuckles the 61-year-old during a rare extended inter-view with

Institutional Investor

. Especially puzzling, hesays, is how people continue to shout and gesture at oneanother to trade securities when computers can do the job far better. “Nothing makes sense. Everything is mixedup and different than I think it should be.”Over the course of more than three decades in finance,the stubborn Peterffy has battled to set things straight.Since 1977, when he left a job developing commodities-trading software to become an op-tions trader on the AmericanStock Exchange, he has refused toaccept the clubby, backward reali-ty of the trading world. Instead hehas striven to remake it accordingto his vision of supreme efficiency through automation. Along the way the once-poor defector fromCommunist Hungary has builtthe 16th-biggest securities firm inthe U.S., specializing in the trad-ing of options and other deriva-tives, and turned himself into abillionaire several times over. Hehas exerted a profound influence on the way stocks andoptions trade globally, helping to speed the ascendancy of electronic exchanges and to lay the foundation for the al-gorithmic trading craze that is reinventing how shares of stock change hands (see page 47). His vision of the way Wall Street should work has gained him the ear of finan-cial regulators, who have adopted many of his ideas re-garding market structure.Interactive Brokers today is one of the world’s biggestmarket-making firms, dealing in more than 9,400 securitiesand doing business electronically on more than 50 exchangesaround the world. Peterffy owns 85 percent of the Green- wich, Connecticut– based firm, which takes in revenues of $1 billion annually and books half of that as profit.But Peterffy is not content to sit still. Late last monthhe brought Interactive Brokers into the bidding for partsof troubled derivatives brokerage Refco, which filed forbankruptcy protection after federal prosecutors chargedits former CEO with disguising $430 million in customerdebts to boost the fortunes of the company’s August IPO.Such a deal could instantly supercharge Peterffy’s broker-age operations, whose growth has lagged that of his firm’smarket-making business. But considering Refco’s uncer-tain state, it would be a risky move for someone who hasso carefully engineered his success until now (see box).Peterffy’s considerable accomplishments notwith-standing, outside rarefied trading circles few have heardof him or his firm. And that’s just fine by him. An in-tensely private man, he sometimes speaks to the press orpublishes papers in academic journals to voice his viewsabout market structure, but he has long shunned publici-ty pertaining to his personal life and career.“Thomas is one of those rarepeople who doesn’t seek fame or wealth for its own sake but focus-es on doing what he considers tobe right and necessary,” says PhilipDeFeo, who was CEO of the Pa-cific Exchange, one of the many stock and options markets thatcount Interactive Brokers as amember, until its acquisition by Archipelago Holdings earlier thisyear. Peterffy was instrumental,for instance, in helping persuadethe Securities and Exchange Com-mission in 1999 that U.S. optionsmarkets could be linked electronically to ensure that in-vestors receive the best possible prices. “He risked every-thing to push for more-efficient electronic tradingnetworks and helped persuade the financial world these were possible and preferable,” DeFeo says. “If you look ata lot of innovations and intriguing market structure pro-posals, at their roots you’ll often find Thomas.”But Peterffy’s intensity also has a downside. He is driv-en by an unstinting belief in efficiency as an organizingprinciple — not just for markets and business but for allof society. His commitment to this ideal is the key to hissuccess, but it can manifest itself in the eyes of others asegomania, condescension and micromanagement. AndPeterffy’s unwillingness to suffer those who lack that com-mitment has alienated colleagues and business partnersover the years, preventing his firmfrom becoming evenlarger and more influential. He typically shuns marketingand advertising, for example, as needless and inefficient if a product or service is truly valuable. (A recent campaignto attract Refco customers is a rare exception.) Peterffy’sforceful personality has turned away numerous potential

“

As I stood on theﬂoor

I was constantlyfantasizing abouthow to put whatI was doing into acomputer program.

”

INSTITUTIONAL INVESTORNOVEMBER 2005

acquirers, including Morgan Stanley and Goldman, Sachs & Co. Gold-man very much wanted to buy thefirm in 1999 before it swallowed uptwo similar concerns, Hull Groupand Spear, Leeds & Kellogg.“He has an idealistic view of the world,” says Thomas Russo, a vicechairman of Lehman Brothers whohas known Peterffy for nearly 30years. “He figures if all financial mar-kets are as efficient as they can be,then it will be a better world. He isdriven to pursue that goal. And he isvery single-minded about it.” AVOIDING THE CROWDISsomething that Peterffy learned at anearly age. Born in the basement of aBudapest hospital during a 1944bombing raid by the Russians (Hun-gary was an ally of the Axis powers dur-ing World War II), he grew up in afamily whose past successes as mer-chants, landowners, soldiers and politi-cians quickly got them branded as ene-mies of the postwar Communistregime. Teased at school, where he re-fused to accept the party indoctrination of Hungarian youth,Peterffy was regaled by family mem-bers with tales of past wealth and glory.“I didn’t grow up in a great dealof abundance, but I heard abouthow good it used to be before the war,” he says. As a young man Peterffy decidedthere was no future for him in Hun-gary, and in 1965 he left his engi-neering studies in Budapest andmoved to New York. He spoke noEnglish but found his way in the city by reaching out to family friends who had also fled the Soviet-backedgovernment. Soon he landed a job asa draftsman designing highways foran engineering firm. The work didn’tpay much; Peterffy shared a spartanrailroad apartment on Manhattan’sUpper East Side, complete with abathtub in the kitchen, with Christo-pher Tors, a fellow émigré.“Our parents had been friends,and it was suggested that we couldshare an apartment,” recalls Tors, who later became a trader at Gold-man and now runs Sasqua Group, afinancial markets recruiting firm. Heremains Peterffy’s closest friend. When Peterffy’s engineering-firmbosses bought a new computer andasked for volunteers to learn how toprogram it, he was quick to step forward. “Computer language was easi-er to learn than the Englishlanguage,” he explains. “I realized if Icould master the way computers worked, I could find a job, so I sortof taught myself from the manuals.”His logic paid off: By 1967, Pe-terffy had landed a job at Aranyi As-sociates, a computer consulting firm

Peterffy enters the battle for Refco

homas Peterffy, the iconoclastic electron-ic trading pioneer and founder of Interac-tive Brokers Group, can be as difficult towork with as he is brilliant about markets. Hisuncompromising personality is one reason the$2 billion-in-capital firm has grown solely by or-ganic means over the past three decades, ratherthan through mergers and joint ventures likeother market-making and brokerage houses.But with his bold bid last month to acquirethe exchange-traded futures unit of scandal-plagued Refco, Peterffy showed he is preparedto change his go-it-alone formula.Acquiring the Refco unit, which before itsOctober 17 bankruptcy filing was the world’slargest futures brokerage, would be a quick,potentially cheap way for Peterffy to super-charge Interactive’s brokerage division. Thatcustomer-facing part of the firm, launched in1993, has failed to grow as fast as its olderand more successful market-making unit,which operates on 55 exchanges around theworld.“It would result in the preeminentglobal futures and options brokerage,” saysPeterffy,adding that he is familiar with Refco’sbusiness after trading the same markets formany years. “I know how they trade and howto deal with them.”Refco’s bankruptcy filing came after itforced out CEO Phillip Bennett, who is facingsecurities fraud charges for allegedly hiding$430 million in debts from investors in Refco’sAugust initial public offering. Bennett hasdenied any wrongdoing and is contesting thecharges. J. Christopher Flowers, a formerGoldman, Sachs & Co. partner who now runsa private equity firm, emerged as the first suit-or for the bankrupt unit, bidding $768 million,a fraction of its estimated prescandal value.At about the time of Flowers’s offer, Pe-terffy also reached out to indicate his interest.The bankers and lawyers handling the sale forRefco — at Goldman and law firm Skadden,Arps, Slate, Meagher & Flom — were not re-ceptive, he says. “We couldn’t get any conver-sation going with them,” Peterffy asserts. “Wethought we were completely frozen out.”Responds a Goldman spokesman, “We putevery approach that we received to the boardmembers.” Skadden partner J. Gregory Mil-moe said during a bankruptcy court hearinglast month that Peterffy was among severalbidders who had contacted him but that “therewere a number of people in that boat that wehadn’t had time to reply to” before filing forChapter 11 protection.Frustrated, Peterffy ran full-page ads in the

Wall Street Journal

and other national paperssoliciting Refco’s customers. Normally loath toadvertise (story), Peterffy is glad he did in thiscase. A number of Refco clients have trans-ferred their accounts to Interactive Brokers, hesays, declining to elaborate.By the end of October, Interactive Brokershad found its way into the auction process andstood as the highest bidder, willing to pay$858 million for the Refco unit. But severalother entities, including multibillion-dollar pri-vate equity firms Warburg Pincus and ApolloAdvisors, were also circling, and the outcomeof the auction was still very much up in the air.(Finalbids for the November 9 auction were dueby November 4.) In any case, taking over theRefco brokerage may involve substantial risks,given that authorities continue to investigate thefirm’s finances — and that customers may con-tinue to flee. “We look forward to the opportuni-ty to conduct due diligence,” Peterffy says.Regardless of the outcome, Peterffy’s in-volvement speaks volumes about the extentof his ambition. At 61, he’s not stepping downas CEOanytime soon. And if furthering hisfirm’s reach means abandoning his lone-wolfapproach, he appears willing to do so.