Electronic Brokerage: The guest spotlights Interactive Brokers (IBKR), emphasizing decades of automation, low costs, and best execution as a durable competitive moat.
Options Trading: Extensive focus on tight spreads, mid-price execution, and limit/algo orders, with options strategies cited as key drivers of client outperformance.
Prediction Markets: Strong advocacy for forecast contracts (weather, politics, CPI) as superior consensus tools that can even serve as targeted portfolio hedges.
Regulatory Landscape: Notes friction between CFTC and securities rules that limits single-company prediction questions, calling for clarity to unlock broader utility.
Payment for Order Flow: Critique of PFOF and “visible NBBO-only” best execution, arguing true price improvement within the spread matters most for active traders, especially in options.
Platform Capabilities: Highlights multi-asset trading in a single account, fractional shares, block trading and seamless allocations, and robust education via IBKR Campus/InvestMentor.
Market Outlook: Discusses oil’s spike and volatility; expects a resolution that could pull oil back toward $50 and support an equity market rebound.
Risk Watch: Flags private credit as a structural concern while noting markets remain relatively calm given situational, not systemic, drivers.
Transcript
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 Horowits & Company. If you're looking for a portfolio manager, look no further. Horowits & 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 Pedy, chairman and founder of Interactive Brokers. All this and much more on episode number 964 of the Discipline Investor podcast. and welcome to the discipline. 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 we've been faced with some some crazy things that are going on, right? I mean, all the way back to um the challenges that you and I have seen like the financial collapse of 2008 09. We had CO shutdowns. remember that? That was just just just a couple days ago. It seems we had this massive inflation in 2122. And each time that something happens, it seems like, wow, it's never going to be 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 that saw the same thing happen in co money was splashed along the the the streets basically when the entire world was shut down because it's not allowed to happen. And what 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 60s7s this is no longer allowed in our current economic environment the Fed has taken the the side of well uh 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 uh modern monetary policy and modern mon monetary theory is is 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 fortell a recession and market corrections and bare 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 and anytime they see any inkling of any good news and that says a lot. Yes, we're in a downtrend. No question about right. I don't I don't 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 it's 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 right keep your eyes on the news flow even um the smallest of small items like dating of money that we saw a couple days ago and throughout the week on 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 um I'm sure he has some great insights. Our guest today is Thomas Pedy. 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 in the from the uh to the United States in um 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 wild wide variety of products, including stocks and options, forex, futures, bonds, CFDs, and funds, and over 170 markets and in over uh 29 currencies around the world. Wow, pretty impressive. Let's get to it. So Thomas Perfey, 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 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 >> Oh, here here's here's here's >> you're fantastic. Thank you. >> Here's some of the here's some of the things that I have. Tell me 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 an American, but I I don't know which. >> But either way, there was something going on in the background. >> Maybe German. Right. >> 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. >> Uh well yes. Uh you see I'm so I'm I'm uh not a very tall person. So when I went on to the uh floor of the stock exchange, I I was surrounded by these huge guys and and uh everybody, you know, had a louder voice and and of course they didn't have an accent. Nobody could understand me. So I 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 uh 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 uh uh different options on an underlying stock and it 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 uh even though they 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 like the price for himself then he gave very little to the people right >> who wanted to participate and when he didn't like the price he gave it all to them. So, so you grew up in 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, preWorld War II novels like Dickens and Balsac and >> That's right. Not traditional economic trends, the texts, right? >> That that's absolutely correct. I didn't know anything about economics except from what I learned maybe from from Zola because Zora one of the French writers had several books on on on the French stock exchange in the in the late 1800s. So that was interesting. >> So you do do you think that modern foreign finance as we know it today is missing the human side of the markets? the human side of >> you know kind of what you learned were were again some of the things you learned were were more of a humanistic standpoint regarding I think the economics rather than just textbook economics am I wrong about that maybe that's >> well you know practice always helps I yeah I mean so I basically learn most of what I have done by doing it not by reading about it >> right right >> that's true so so I don't you know I don't even have a college degree to Are you frankly >> and is that something that has bothered you? You you've you've built yourself into >> it hasn't bothered me in the last 30 years, but it has bothered me in the preceding uh 50 years because I mean preceding uh you know it didn't bother me when I was a baby. >> Right. But, you know, since I've been in my in my 20s all the way up until I became successful, it bothered me because if I 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, you 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. and not suggesting I 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 uh the the fact is that uh you know lately people have woken up to the fact that it is not as important as it was made out to be uh uh 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 I found this out. I was a little bit uh 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 if if I spent a lot of time thinking about what goes on there, I would. >> Yeah. >> But, uh, you know, I just have to focus on Interactive Broker. So, I do not 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. Uh, great guy. I got to know him over the years. Um, these are just people that really were dedicated to it. And is that is what what's part of the culture at Interactive Brokers that helped build a team like that? Well, you know, I I I used to my management style was letting people do what they wanted to do and and and see what they were the best at. So, you know, they could succeed uh and and uh you know, when they were successful, they were I let them move into the jobs they basically wanted to do. So, it was all up to them. And as long as uh you have some control over that it's it's it works very well. >> Yeah. >> Also many of the people have gotten very became very wealthy because the company was successful and everybody got stuck every year. So they all accumulated and so that was it's easy to 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 cuz I think it's just fascinating. So in the 1980s before laptops >> you built custom handheld computers so your traders could um price options faster than the competitors on the exchange floor. Right. >> That's 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, I you know, it so on on some like the on 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 I I I sued them, they sued me and so we had all kinds of um regal wranglings over the years. >> And and it was was it because of the wireless part of it or because of the handheld? Uh well, basically the the the people who were who didn't want to have their competitors use use aids >> that help them to become better and make a tighter narrower market. They didn't like it because so it it's it's not it it had nothing to do with the vir any that they could have objected to. They would have objected to. >> Yeah. Cuz I heard there some story about uh once upon a time you there was something about a wire down the sleeve of your coat or something like that. Uh some weird story. >> No, they have they have they have cut many times cut our wires. Uh you know we we communication wires. Right. Right. >> And and they just cut it with a plier and Yeah. >> And this was because what was that? Was it because they were so afraid? >> Sabotage. Sabotage. >> No. But why did 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 So they they didn't want to be competed out of business, right? Which they eventually were, right? But does any of this ring ring true with you with with kind of the worry about AI these days? >> Is there a similarity between the two times? >> I don't see this the the the the big opposition to AI. I think I it's I find it surprising that many that not more people seem to be vocally opposed to it. uh like the software companies that that uh you know spent many many years building up their software now see that AI can do the same thing in in much shorter period of time but they I mean no they they are not they don't come out to oppose it as they did in those days I mean you know unions in those days were were much more vocal So, one of my um 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 uh outcry was back in the day and and kind of why you thought this >> it So open cry is when you had to cry out the the order you had or the mark the the bid you had or the offer you had it it was all done by voice people in a crowd by voice making agreements with each other. >> Mhm. >> Right. And then use and use hand signals like a palm out, palm in. >> Hand the clerk the clerk signaled to the broker and the broker then did the trade and he he signaled back the execution. So yes, the brokers use hand signals with the clerks. the the the traders and market makers uh were uh of course on their own and then there were brokers who were also trading for themselves and and they use send 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 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 uh they can be 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 aisle cray would disappear and that the exchange floors would be? >> I still do. I still I still I still believe that uh in a in a free market economy a competition is good and the and the person who provides the best service wins the competition. Right? So that the the the the person that pro so the broker that provides the best exe the really best execution best execution is relative to better than other brokers execution is still is still better. Right. Right. >> And and uh so the your your clients tend to do better when you when you give them the best prices. Right. >> Mhm. And uh so that's why I'm uh I I have never uh got gone along with uh selling the order flow to to somebody else to execute it against themselves. So >> that's been a big issue of yours is is is payment for order flow which is which a number of year a number of years ago uh 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 and that is it's interesting because there's a lot of rules about best execution and I've always wondered how payments for orderflow fit into >> okay but best execution has become a a name for ma for executing a trade within the best visible bid and best visible offer. Mhm. >> 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 and you know the the best price within that bidden offer is important. >> So especially in options so you say option market sometimes three four cents wide right maybe 5 cents wide. So if you if you if you can execute it in the middle that makes a big difference. So if you trade only uh one or two times a year, it doesn't matter. But if you are 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 you can only bid within 5-cent increments still on options. There's no you can't grab in between. >> Yeah. Right. >> Which is which is awful. You know what happened to the penny spreads on things. So >> yeah, but that that's that's 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 we execute in between the best. >> No, I know you do. No, I know you do. Yeah. Some So I'm just saying that 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 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, so I' I've I've um so you continually innovate. Um 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? >> In the markets. >> Yeah. just generally speaking the 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 I I still would like to see more competition than there is. I would uh I would like to see of course more interesting products and uh yeah and I would like to see less useless regulation. There is a lot of regulation that is is basically doesn't lead to anything. It it just uh makes it more difficult to conduct the business and puts a lot of expenses on the on the people who who do the business and then they have to pass that on to their clients and that is a big uh that that is a a big big problem because markets would be much more efficient without all that regulation. No, now you you as at IB uh you've intentionally limited leverage, right? You enforce very strictly margin rules, um restrict certain client behaviors. As a matter of fact, uh I 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 uh in 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. Uh there were there were brokers that didn't properly do what they needed to do to to to manage their margin and all. >> We we lost a lot of money in that. Yes. >> But 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 you don't >> it's it's not you see that's that's that's uh regulation. So that we are compelled by regulation to to survey our clients against manipulative trading. And for example, so I'm 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 that's called manipulative behavior. But in my mind, as long as you bid it 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 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 role rule and we have to enforce it, right? That's like saying that a baseball pitcher can't throw a curveball. >> That's right. >> 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. That's that's >> Yeah. Yeah. You've also emphasized that um interactive brokers low cost uh comes from I think a companywide discipline. So many firms out there want your cost discipline, but I don't think I'd be hardressed to find anybody that could pretty much replicate it. And so I guess my question to you is >> because it it 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. >> Yeah. >> Constantly >> which puts a moat around which puts a great moat around you. >> That that that's what is the mode, right? And and but maybe 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, what what what um so just a couple of things that I kind of um really dug into and and was thinking about because like I said, I have been a client of of of Interactive Brokers for for a decade at least. Um and I've seen an incredible amount of changes over that time and and it just keeps getting better and better. 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 or or or a problem with the company. That's that's how I look at it, right, from the client side. Um, so I I you know, I think that's great and I thank you for that, by the way. Um, and I think >> I thank you for that. >> Yeah. No, and I think and also all these incentives that are tied to efficiency instead of growth optics. Um and that's also where um you know you've been and over the years where where I think you know you've enforced this internally. It comes out in your earnings last earnings I think from the fourth quarter 2025 business highlights. Um just a few things I'm going to throw out there. Right. So you reported 22% rise in commission revenue to 582 million increase in consumer trading volumes across options future stocks. Um total equity reached about 20 and a half billion. You saw custom accounts increased 32% to 4.4 million. Uh DART's daily activity increased 30% to 4.04 million. Um credits increased dramatically. Margin loan increased dramatically. Is this is this is this is not a one-off? I know that it's been a it's been a it's been a lifelong process for you. >> That is correct. So every generally every year is better than the previous one. And it's been a long time since that since that has not been the case. >> No, it's been great. So, some of the things that you you set up uh forecast trader, that's the I think well I don't say it's the latest, but that's something big that you really went into very uh strongly and you have a big belief in. Can you kind of just give me and and the listeners a little bit um so well I remember when that was coming out by the way. I remember cuz 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 it was it was somewhere around there. Forecasting. >> Which presidential election? >> I don't remember. But I remember I just remember that from my I'm just remembering that. But these prediction markets, right? Um they become they become pretty big. Some of the polling companies are like even leaving the market entirely now as a as as >> well. Yeah. and and and that certainly I mean at this election you will see that the prediction markets will be well ahead of the polls and and that actually happened in the last election also. I mean uh you know the the the the prediction markets were very firmly convinced which way the election is going to come out. And so they there was you know the the the Republican win was uh much more likely in the election markets than in uh than according to the polls. I mean, if with that 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. 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 Hasset was the lead. Remember that? Uh and he was like 90 or 80 80 to to 20 that Hasset was going to become the Fed chair. Um well, but you know, and that he was going to be picked whatever. I'm like, "Oh, that seems like this this this president, he moves around a lot. I should really go the other side of this one >> and that would have been a good play right there. But there's so many different things and it keeps on growing the opportunities >> to do this. So we have forecast contracts on economics and a variety of other um weather uh politics. >> Yeah. Oh yeah, I I in my mind it's very important that we take this forecast uh trading seriously and and we don't uh devote it to to sports and and frivolous questions like will the Kardashians get married or divorced or whatever. uh so you know because it's it's it's basically a fantastic tool to look into the future via the consensus opinion and so as as long as we can build out the appropriate questions we can build a model of the future and we can project that forward and keep keep getting more and more opinions and that will guide people on how to how to what to do to to to optimize their uh individual benefits. >> Well, >> and and and and that will drive to the communal benefits. So, so it's it's it's it's a much better way of organizing something that is then it's it's it it's been organized currently by the by the free markets or even worse the of course uh you know government edicts. So the thing also is that um you know we've known for years that economics is no better better than a weather forecast and some analyst expectations of earnings are are are off and purposefully off by the way to hit a lower bar. You know we we play that game. We know this going into well you know what uh analysts expect a 10 cents uh you know per share EPS but the company comes in at 12 right but we know that the companies a lot of companies have told the analyst nine >> or whatever the number is right and the analysts are like well the buy side and the sell side so we know that so this could hopefully clean up some of that >> yes it will uh we have to overcome a a problem here which is a difficulty posed by the securities laws that uh these election markets are regulated by the CFTC. Uh but uh questions about particular companies is a security >> right >> by by law, >> right? So we we need we need some regulatory clarifications here to to make sure that that we can advance to a point where we can basically replace analysts where analysts themselves can become participants in the in the in the prediction markets and and earn their living that way instead of uh you know selling their own analysis. >> So, what is the right now at Interactive Brokers? What's the most often uh utilized forecast contract? Uh >> it will be surprising to you. It's it's the weather. >> It is the weather. Huh. It's the weather. >> It's the temperatures. >> Yeah. The temp It's crazy. >> Yeah. But it's not so crazy because you see especially when temperatures are unseasonably warm or cold that makes a huge difference in in electricity consumption, natural gas consumption and you know what people do with their daily lives. So it's it's uh we we are very substantially under the impact of the weather every day of our lives. So it's not really s surprising if you think about it. So, one of the things I think that's really interesting about forecast contracts that a lot of people don't think because a lot of people think, you know, it's just a binary outcome. Yes or no, which it is. It's easy to understand. I get that. But what's what's really fascinating about this, it can be used like anything else in a way that can be worked like for example as a hedge. So, for example, you have a portfolio of whatever you have and um you you want to protect yourself against a really >> big CPI print as an example. All right. >> Right. So what do you do? Well, I can hedge it by going, you know, buying a put option on a broad-based market or I can sell some calls or I can go and maybe work the opposite side of futures but or or or or all that. But but what you could do here or sell but what you could do here is take a uh one step over but go right to the direct of what is the CPI going to be and utilize that as the hedge. Is that that's something right? >> Yeah, absolutely. So, it's it's it's a straight cut to to where you want to go and not uh try to bet on the consequences. >> Yeah. That's fascinating. It's great stuff. Yeah. >> So, um and this this is this is this is um what's really great about Interactive Brokers. By the way, uh for those of you who have never seen this in action, you could do this pretty much all in one account. It's it's not like you have >> Of course, it's all in one account. Everything we do is our customers just have one account. They do securities, commodities, foreign exchange, options, futures. Um, >> but that you say it like it's really easy that a lot of other firms not so easy. They make you open up 14 different accounts. >> Yeah, we have all those 14 different accounts behind the scenes. >> Right. That's what I'm talking about. >> We save that for our customers. We just give them one account to see, >> right? Love it. >> Right. And we do all the bookkeeping. >> That that's that's so great because >> right >> as as I could tell you as being in the business as long as I have trying to reconcile all these different places at once for a client clients sometimes can't even look at one account. >> You know, it's hard enough for that. But having them look at 14 different 10 five two is very very difficult. One of the things that I found really interesting in a recent discussion I had with some people at IBKR is that in 2025 clients outperformed the S&P 500 right you were individual clients did about 19% registered investment advisor over 20 hedge funds nearly 29% which is great for hedge funds by the way so what do you think explains that is the tools the type of investors attached or something structural in your platform >> so I think the primary is the best execution. So, the best prices we are able to get for our customers. But don't forget this these statistics only include customers who have started the year with $50,000 or more in their account. And the hedge funds only the hedge funds that have started the year with a million dollar or more in their account. So, uh, smaller smaller customers, I don't know how well they've done. Maybe they haven't done that well. So I'm I'm so it I always like to specify that I want people to understand that these stats are for people who have had more than $50,000 in their account with $50,000 of value in their account on the first day of the year. >> But I think I think okay still with that not I don't think we it's still pretty impressive. >> Yeah. Sure. So, so >> it's very impressive. >> But you're thinking Beex's execution. Just that little sliver, that little extra amount that actually goes into the actual deal is is actually our clients trade very often and especially option traders, right? And and and also that the fact is that that much of that good performance has come from options. So people who trade options uh people who have a portfolio and and they trade options against the long stock and uh so they add additional yield to their portfolio. >> But also I think that one of the things I know because I get a lot of uh I get a lot of emails and I got a lot of popups and I got a lot of things and alerts like hey by the way be careful with market orders. Be careful market orders. Be careful market orders. Even if I don't use market orders, it's like always popping up and I think >> but please use market orders because you know obviously I mean why why when you want to buy something why pay what is being asked? Why not try to negotiate right? >> Right. >> So a limit order basically is a way for a trader to negotiate the price. >> Right. Exactly. Right. Exactly. So, this is something that you really push and I think that that's an important thing for a couple of reasons because I don't I don't think your system would allow this. By the way, folks, what's really interesting is on a lot of systems you have uh market, limit, stop, stop, limit. That's it. That's the basically the four you get. There are so many choices on Interactive Brokers. There's mid-pric, there's negotiated price, there's algo, there's all there's there is I don't know, would I be right to say there's like a dozen different 10 different options to choose from when you're actually doing this? >> Well, at least. Yeah. >> And that so you need to know that. But what happens there is the system, the algos, the computer brains behind this. What's happening is it's you're allowing the system to help you negotiate the price and get even better execution than quote unquote best execution. I don't know if that's a proper way to say Yeah, that's very well put. Yes. >> So, so what's interesting about this is that you especially if you're if you're an adviser, for example, and you're trading on a, you know, for your clients and you block trade. And what's really cool about this is that it's a one-stop shop. You could say, "Hey, I want 5% of Apple in my all my client portfolios or by by these 10 portfolios. I want 5% Apple in this portfolio." You click the button, you click the particular buy sequence that you want, whether it's algorithmic trade, whether it's a you you could do things like, you know, blend in over time. You there's a variety of different things you could do, but let's just keep it simple. You say, I'm going to buy. When you buy, you automatically buy it. At that moment, once you buy, it is allocated proportionally to each of the accounts behind the scenes automatically. And each account is hit with a transaction fee that is uh also pro prrated according to the total buy. So you're buying one block. >> So So let me say this. So if you're managing 20 accounts and you are buying say Apple for the 20 accounts, we we do one order of Apple. We execute it maybe in many many stages but it's one order and we charge you commission for the one order >> and then we allocate it. If you buy an ETS, we ETF for all your clients, we only charge you one times 149. Not not ETF, mutual fund, right? We charge you once495. And if you want to allocate it to a,000 accounts, you still only pay once 14.95 for the whole lot. That's it. >> Yeah. >> So, yeah. >> So, it's really nice. And and then also going back to the allocation process, everybody gets the same price because you just wait for that order to be concluded and it's it usually happens quickly, but everybody gets, you know, $15.92 >> across the board. It prevents cherrypicking. You don't have to worry about that. So therefore, from a client compliance standpoint, you don't have to worry about something saying, "Hey, why did Joe get 20 cents less?" This all happens when I tell you in a blink of an eye, it's not funny. It is so fast, efficient. Then you can go back and say like we did recently, we go in and say, you know what, here's our orders. Here's what our account looks like. We're going to go to the rebalancer. Rebalances shows that I owe own 5% Apple. You know what? I've decided I'm going to take that down to 4%. I click 4%. I click the button. Oh, I don't have to think the everybody's exactly at 4% because I use fractional shares also, by the way. Thank you for that. Uh that's that may not seem like a big deal to people, but I'm telling you to keep portfolios even. Fractional shares are a beautiful thing and I have yet to meet a particular stock that I can't do a fractional share of. So you buy that. So everybody gets in my portfolio 4% now of Apple across the board at the same price I sold at. It's allocated instantly. Saves me literally our office. One trade could be 20 minutes per trade trying to allocate trying to deal with this making sure the compliance is right and all that. So wonderful stuff. Wonderful stuff. education big IBK ourr campus this is a a I I think you I I call it please don't be offended by this like the the SCI sims right a best the our best customer is an educated consumer right you know where for Sims >> that was that was uh for for the clothing shop right yeah our best consumer is educated whatever >> Sims right >> yeah Sims yeah sims where where I I stopped shopping there because they wouldn't give me the hangers >> I'm like wait I'm buying all this stuff you won't give me the hangers no they folded up I'm take it all back. I'm not buying it. >> That was their way of saving money. But but an educated consumer is your best customer. So that I think is the part of this whole >> IB IBKR campus, right? Which is this >> huge huge suite of educational content um and courses and webinars and and and I was on there by the I've taught uh on there before um financial literacy which I think is unbelievable because it is true that if if you and that's why I've been doing this podcast since 2007. If we teach people how to create their own sense of financial security they'll be so much better off in the future and we're just yeah you know selfishly get more clients but also just the the thousands of people that I've taught thousands and thousands between my books and the podcast. It is such a wonderful feeling when I get somebody tells me, "Hey, I'm retiring. Thank you for all the stuff you've done and you and you've you've taught me on your podcast." And that's kind of like where you are here, too, right? >> Yeah, you're absolutely right. I mean, I meet customers almost every day. I run into somebody who says, "Hey, I'm your customer." And I'm always so happy when I meet somebody. >> So, so the teaching that you do, um, there's there's a broad range, right? You talk about strategies, market mechanics, not only IBKR platforms, right, and tools, but teaching them about Black Scholes. By the way, I'm going to go back for a second. You developed on your own pre-Black Scholes, didn't you? >> I did. Yeah. >> Which is, by the way, just so nobody don't know about this. It's an options pricing module uh mechanic um options pricing methodology that understands like uh you know, strike price, volatility issues, all that. But you were so there is we have on our website something called probability lab. >> Probability lab. Okay. >> And and you can go there and see and and you see what what distribution what probability distribution the current option markets imply for any specific stock. >> Mhm. So, so um again this is not just limited to options. There's so many different things that are out there. Um you also have IBKR invest mentor. This is um more learning for that's for beginners. >> Yeah. This for the youngans. >> Yeah. >> And that and that helps him because of course those youngans are always going to be youngans. >> Yeah. And that's for young young people and they are you know they don't have to be customers to to avail themselves of that. So there are a series of of lessons very short two 3 minute long lessons and people in their teens can learn all about um the economy the markets how how how free market economy works and everything about it. So you also have portfolio analyst by the way which you don't another thing that you don't have to have an account for. You can you can take a look at that and there's other ways that you can uh put all your portfolios from different places together. I mean just the wealth of offerings it seems like it it's it's it's never ending it which is great right. I mean obviously something's work. >> We're still working on >> you're still working. Oh I get that. And and and then you're always working and tweaking >> uh what you're doing and I mean I think that is just amazing. you've made an incredible mark on the investment world and and I'm and I'm so happy uh to finally meet you and >> thank you very much. You're you're incredibly flattering. Thank you. >> It's great. It really is great. So, in closing, um anything else that you want to talk about? Some of the things that are happening, some of the exciting things that are going on in the world of investing or or >> Well, of course, there is this war going on, right? And and of course I I'm I'm I think and I'm very hopeful that it is going to end very very soon and that we'll be victorious. >> Yeah. >> And uh so the oil prices will come down to $50 again and uh I think the market is going to turn around and go up >> during during these kinds of periods. Um do you see a very heightened amount of uh you know like darts and and and transactions? I'm assuming you do. >> Yes. For the past uh uh couple of weeks, we had a a yeah about four four close to 5 million trades a day. >> Wow. Wow. I mean, these are the things that people get nervous about and all, but I I think as I'm looking from afar, just stepping back a second, looking at these markets, they're a lot calmer than I would have expected. you know, I I would have thought that, you know, you you pop into 116 would have been a 5% move. I mean, Korea, for example, because of course they're more reliant on the oil, uh, and all that, but, you know, generally speaking, I think that the markets kind of get that a lot of this stuff is I don't want to say temporary, but at least situational. >> No, I I temporary is probably the right word. >> Yeah, it's interesting. So, we'll see what happens. We'll see what happens. >> Transient. >> Oh gosh. Oh gosh. Oh, no. Not that word. That's that's it's a minefield right there. Uh we're going to have all the information on uh Thomas Pedy uh and also on Interactive Brokers on the show notes for episode number 964. Yeah, Thomas, we've been doing this since 2007. >> I'm proud to be number 964. Thank you. >> Thanks so much. I'll see you again soon. >> Great. Thank you very much. >> Thanks. Wow. I've done a lot of interviews in my day. I got to tell you something. Hundreds and hundreds and hundreds if not in the thousands of interviews over the time on the various podcasts that I've done. And that was one of my favorites right now uh of the recent memory talking with a gentleman who is a self-made success story that has built such an incredible platform that has spanned decades competed against the big boys in the early days became a big boy in its later days and is giving so much back to the education in and and the abilities for not only hedge funds but individual traders to do the things that they do. Seriously, you got to respect something like that. You got to listen to what he has to say and you got to appreciate what is going on here and the opportunities that he has given all of us. So, uh, you know, even though, uh, he's not listening right now, I thank Thomas Pedy again for that. And, uh, want to want to say that that was that was something. Hopefully, you all learned a lot from that about the ability to succeed through hardship, hard work, discipline. And we're going to leave it at that. Thank you for joining me this week. Next week, we have coming up, who do we have? David Gaffin, uh, is coming up, Howard Linden, and then Thomas Thornton. all in a row. Great names, great minds, great ideas, and going to give us some great opportunities right now through all the mess that we're seeing right now with regard to the oil markets, the straits of Hormuz, geopolitical tensions, concerns, stock markets moving all around. It's time to keep your discipline. Understand who you are. Understand where you want to go, what you want to be, and make sure that you are are are are focusing in on the goal, not on where you are right now. Thanks for joining me this week and every week. I'll see you again real soon. This podcast is intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowits and Company, Inc., an investment adviser registered with the US Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. Advisory services are only offered to a client or prospective clients where Horowits a company is properly registered or is excluded from registration requirements. Any mention of thirdparty companies, products, or services is provided forformational purposes only and does not constitute an endorsement. Hypothetical scenarios or forward-looking statements are for illustrated purposes and should not be viewed as guarantees. Content is intended for US residents only and may not be applicable in other jurisdictions. Listeners should consult a qualified financial adviser before making any investment decisions. Please visit our website for additional information, disclosures, as well as a copy of our form CS. Advertisements are not related to the host or affiliates and are not considered recommendations by the host of the show or any affiliates of Hollywood.
TDI Podcast: Thomas Peterffy Unfiltered (#964)
Summary
Transcript
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 Horowits & Company. If you're looking for a portfolio manager, look no further. Horowits & 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 Pedy, chairman and founder of Interactive Brokers. All this and much more on episode number 964 of the Discipline Investor podcast. and welcome to the discipline. 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 we've been faced with some some crazy things that are going on, right? I mean, all the way back to um the challenges that you and I have seen like the financial collapse of 2008 09. We had CO shutdowns. remember that? That was just just just a couple days ago. It seems we had this massive inflation in 2122. And each time that something happens, it seems like, wow, it's never going to be 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 that saw the same thing happen in co money was splashed along the the the streets basically when the entire world was shut down because it's not allowed to happen. And what 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 60s7s this is no longer allowed in our current economic environment the Fed has taken the the side of well uh 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 uh modern monetary policy and modern mon monetary theory is is 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 fortell a recession and market corrections and bare 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 and anytime they see any inkling of any good news and that says a lot. Yes, we're in a downtrend. No question about right. I don't I don't 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 it's 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 right keep your eyes on the news flow even um the smallest of small items like dating of money that we saw a couple days ago and throughout the week on 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 um I'm sure he has some great insights. Our guest today is Thomas Pedy. 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 in the from the uh to the United States in um 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 wild wide variety of products, including stocks and options, forex, futures, bonds, CFDs, and funds, and over 170 markets and in over uh 29 currencies around the world. Wow, pretty impressive. Let's get to it. So Thomas Perfey, 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 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 >> Oh, here here's here's here's >> you're fantastic. Thank you. >> Here's some of the here's some of the things that I have. Tell me 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 an American, but I I don't know which. >> But either way, there was something going on in the background. >> Maybe German. Right. >> 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. >> Uh well yes. Uh you see I'm so I'm I'm uh not a very tall person. So when I went on to the uh floor of the stock exchange, I I was surrounded by these huge guys and and uh everybody, you know, had a louder voice and and of course they didn't have an accent. Nobody could understand me. So I 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 uh 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 uh uh different options on an underlying stock and it 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 uh even though they 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 like the price for himself then he gave very little to the people right >> who wanted to participate and when he didn't like the price he gave it all to them. So, so you grew up in 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, preWorld War II novels like Dickens and Balsac and >> That's right. Not traditional economic trends, the texts, right? >> That that's absolutely correct. I didn't know anything about economics except from what I learned maybe from from Zola because Zora one of the French writers had several books on on on the French stock exchange in the in the late 1800s. So that was interesting. >> So you do do you think that modern foreign finance as we know it today is missing the human side of the markets? the human side of >> you know kind of what you learned were were again some of the things you learned were were more of a humanistic standpoint regarding I think the economics rather than just textbook economics am I wrong about that maybe that's >> well you know practice always helps I yeah I mean so I basically learn most of what I have done by doing it not by reading about it >> right right >> that's true so so I don't you know I don't even have a college degree to Are you frankly >> and is that something that has bothered you? You you've you've built yourself into >> it hasn't bothered me in the last 30 years, but it has bothered me in the preceding uh 50 years because I mean preceding uh you know it didn't bother me when I was a baby. >> Right. But, you know, since I've been in my in my 20s all the way up until I became successful, it bothered me because if I 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, you 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. and not suggesting I 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 uh the the fact is that uh you know lately people have woken up to the fact that it is not as important as it was made out to be uh uh 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 I found this out. I was a little bit uh 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 if if I spent a lot of time thinking about what goes on there, I would. >> Yeah. >> But, uh, you know, I just have to focus on Interactive Broker. So, I do not 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. Uh, great guy. I got to know him over the years. Um, these are just people that really were dedicated to it. And is that is what what's part of the culture at Interactive Brokers that helped build a team like that? Well, you know, I I I used to my management style was letting people do what they wanted to do and and and see what they were the best at. So, you know, they could succeed uh and and uh you know, when they were successful, they were I let them move into the jobs they basically wanted to do. So, it was all up to them. And as long as uh you have some control over that it's it's it works very well. >> Yeah. >> Also many of the people have gotten very became very wealthy because the company was successful and everybody got stuck every year. So they all accumulated and so that was it's easy to 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 cuz I think it's just fascinating. So in the 1980s before laptops >> you built custom handheld computers so your traders could um price options faster than the competitors on the exchange floor. Right. >> That's 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, I you know, it so on on some like the on 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 I I I sued them, they sued me and so we had all kinds of um regal wranglings over the years. >> And and it was was it because of the wireless part of it or because of the handheld? Uh well, basically the the the people who were who didn't want to have their competitors use use aids >> that help them to become better and make a tighter narrower market. They didn't like it because so it it's it's not it it had nothing to do with the vir any that they could have objected to. They would have objected to. >> Yeah. Cuz I heard there some story about uh once upon a time you there was something about a wire down the sleeve of your coat or something like that. Uh some weird story. >> No, they have they have they have cut many times cut our wires. Uh you know we we communication wires. Right. Right. >> And and they just cut it with a plier and Yeah. >> And this was because what was that? Was it because they were so afraid? >> Sabotage. Sabotage. >> No. But why did 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 So they they didn't want to be competed out of business, right? Which they eventually were, right? But does any of this ring ring true with you with with kind of the worry about AI these days? >> Is there a similarity between the two times? >> I don't see this the the the the big opposition to AI. I think I it's I find it surprising that many that not more people seem to be vocally opposed to it. uh like the software companies that that uh you know spent many many years building up their software now see that AI can do the same thing in in much shorter period of time but they I mean no they they are not they don't come out to oppose it as they did in those days I mean you know unions in those days were were much more vocal So, one of my um 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 uh outcry was back in the day and and kind of why you thought this >> it So open cry is when you had to cry out the the order you had or the mark the the bid you had or the offer you had it it was all done by voice people in a crowd by voice making agreements with each other. >> Mhm. >> Right. And then use and use hand signals like a palm out, palm in. >> Hand the clerk the clerk signaled to the broker and the broker then did the trade and he he signaled back the execution. So yes, the brokers use hand signals with the clerks. the the the traders and market makers uh were uh of course on their own and then there were brokers who were also trading for themselves and and they use send 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 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 uh they can be 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 aisle cray would disappear and that the exchange floors would be? >> I still do. I still I still I still believe that uh in a in a free market economy a competition is good and the and the person who provides the best service wins the competition. Right? So that the the the the person that pro so the broker that provides the best exe the really best execution best execution is relative to better than other brokers execution is still is still better. Right. Right. >> And and uh so the your your clients tend to do better when you when you give them the best prices. Right. >> Mhm. And uh so that's why I'm uh I I have never uh got gone along with uh selling the order flow to to somebody else to execute it against themselves. So >> that's been a big issue of yours is is is payment for order flow which is which a number of year a number of years ago uh 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 and that is it's interesting because there's a lot of rules about best execution and I've always wondered how payments for orderflow fit into >> okay but best execution has become a a name for ma for executing a trade within the best visible bid and best visible offer. Mhm. >> 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 and you know the the best price within that bidden offer is important. >> So especially in options so you say option market sometimes three four cents wide right maybe 5 cents wide. So if you if you if you can execute it in the middle that makes a big difference. So if you trade only uh one or two times a year, it doesn't matter. But if you are 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 you can only bid within 5-cent increments still on options. There's no you can't grab in between. >> Yeah. Right. >> Which is which is awful. You know what happened to the penny spreads on things. So >> yeah, but that that's that's 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 we execute in between the best. >> No, I know you do. No, I know you do. Yeah. Some So I'm just saying that 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 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, so I' I've I've um so you continually innovate. Um 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? >> In the markets. >> Yeah. just generally speaking the 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 I I still would like to see more competition than there is. I would uh I would like to see of course more interesting products and uh yeah and I would like to see less useless regulation. There is a lot of regulation that is is basically doesn't lead to anything. It it just uh makes it more difficult to conduct the business and puts a lot of expenses on the on the people who who do the business and then they have to pass that on to their clients and that is a big uh that that is a a big big problem because markets would be much more efficient without all that regulation. No, now you you as at IB uh you've intentionally limited leverage, right? You enforce very strictly margin rules, um restrict certain client behaviors. As a matter of fact, uh I 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 uh in 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. Uh there were there were brokers that didn't properly do what they needed to do to to to manage their margin and all. >> We we lost a lot of money in that. Yes. >> But 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 you don't >> it's it's not you see that's that's that's uh regulation. So that we are compelled by regulation to to survey our clients against manipulative trading. And for example, so I'm 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 that's called manipulative behavior. But in my mind, as long as you bid it 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 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 role rule and we have to enforce it, right? That's like saying that a baseball pitcher can't throw a curveball. >> That's right. >> 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. That's that's >> Yeah. Yeah. You've also emphasized that um interactive brokers low cost uh comes from I think a companywide discipline. So many firms out there want your cost discipline, but I don't think I'd be hardressed to find anybody that could pretty much replicate it. And so I guess my question to you is >> because it it 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. >> Yeah. >> Constantly >> which puts a moat around which puts a great moat around you. >> That that that's what is the mode, right? And and but maybe 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, what what what um so just a couple of things that I kind of um really dug into and and was thinking about because like I said, I have been a client of of of Interactive Brokers for for a decade at least. Um and I've seen an incredible amount of changes over that time and and it just keeps getting better and better. 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 or or or a problem with the company. That's that's how I look at it, right, from the client side. Um, so I I you know, I think that's great and I thank you for that, by the way. Um, and I think >> I thank you for that. >> Yeah. No, and I think and also all these incentives that are tied to efficiency instead of growth optics. Um and that's also where um you know you've been and over the years where where I think you know you've enforced this internally. It comes out in your earnings last earnings I think from the fourth quarter 2025 business highlights. Um just a few things I'm going to throw out there. Right. So you reported 22% rise in commission revenue to 582 million increase in consumer trading volumes across options future stocks. Um total equity reached about 20 and a half billion. You saw custom accounts increased 32% to 4.4 million. Uh DART's daily activity increased 30% to 4.04 million. Um credits increased dramatically. Margin loan increased dramatically. Is this is this is this is not a one-off? I know that it's been a it's been a it's been a lifelong process for you. >> That is correct. So every generally every year is better than the previous one. And it's been a long time since that since that has not been the case. >> No, it's been great. So, some of the things that you you set up uh forecast trader, that's the I think well I don't say it's the latest, but that's something big that you really went into very uh strongly and you have a big belief in. Can you kind of just give me and and the listeners a little bit um so well I remember when that was coming out by the way. I remember cuz 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 it was it was somewhere around there. Forecasting. >> Which presidential election? >> I don't remember. But I remember I just remember that from my I'm just remembering that. But these prediction markets, right? Um they become they become pretty big. Some of the polling companies are like even leaving the market entirely now as a as as >> well. Yeah. and and and that certainly I mean at this election you will see that the prediction markets will be well ahead of the polls and and that actually happened in the last election also. I mean uh you know the the the the prediction markets were very firmly convinced which way the election is going to come out. And so they there was you know the the the Republican win was uh much more likely in the election markets than in uh than according to the polls. I mean, if with that 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. 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 Hasset was the lead. Remember that? Uh and he was like 90 or 80 80 to to 20 that Hasset was going to become the Fed chair. Um well, but you know, and that he was going to be picked whatever. I'm like, "Oh, that seems like this this this president, he moves around a lot. I should really go the other side of this one >> and that would have been a good play right there. But there's so many different things and it keeps on growing the opportunities >> to do this. So we have forecast contracts on economics and a variety of other um weather uh politics. >> Yeah. Oh yeah, I I in my mind it's very important that we take this forecast uh trading seriously and and we don't uh devote it to to sports and and frivolous questions like will the Kardashians get married or divorced or whatever. uh so you know because it's it's it's basically a fantastic tool to look into the future via the consensus opinion and so as as long as we can build out the appropriate questions we can build a model of the future and we can project that forward and keep keep getting more and more opinions and that will guide people on how to how to what to do to to to optimize their uh individual benefits. >> Well, >> and and and and that will drive to the communal benefits. So, so it's it's it's it's a much better way of organizing something that is then it's it's it it's been organized currently by the by the free markets or even worse the of course uh you know government edicts. So the thing also is that um you know we've known for years that economics is no better better than a weather forecast and some analyst expectations of earnings are are are off and purposefully off by the way to hit a lower bar. You know we we play that game. We know this going into well you know what uh analysts expect a 10 cents uh you know per share EPS but the company comes in at 12 right but we know that the companies a lot of companies have told the analyst nine >> or whatever the number is right and the analysts are like well the buy side and the sell side so we know that so this could hopefully clean up some of that >> yes it will uh we have to overcome a a problem here which is a difficulty posed by the securities laws that uh these election markets are regulated by the CFTC. Uh but uh questions about particular companies is a security >> right >> by by law, >> right? So we we need we need some regulatory clarifications here to to make sure that that we can advance to a point where we can basically replace analysts where analysts themselves can become participants in the in the in the prediction markets and and earn their living that way instead of uh you know selling their own analysis. >> So, what is the right now at Interactive Brokers? What's the most often uh utilized forecast contract? Uh >> it will be surprising to you. It's it's the weather. >> It is the weather. Huh. It's the weather. >> It's the temperatures. >> Yeah. The temp It's crazy. >> Yeah. But it's not so crazy because you see especially when temperatures are unseasonably warm or cold that makes a huge difference in in electricity consumption, natural gas consumption and you know what people do with their daily lives. So it's it's uh we we are very substantially under the impact of the weather every day of our lives. So it's not really s surprising if you think about it. So, one of the things I think that's really interesting about forecast contracts that a lot of people don't think because a lot of people think, you know, it's just a binary outcome. Yes or no, which it is. It's easy to understand. I get that. But what's what's really fascinating about this, it can be used like anything else in a way that can be worked like for example as a hedge. So, for example, you have a portfolio of whatever you have and um you you want to protect yourself against a really >> big CPI print as an example. All right. >> Right. So what do you do? Well, I can hedge it by going, you know, buying a put option on a broad-based market or I can sell some calls or I can go and maybe work the opposite side of futures but or or or or all that. But but what you could do here or sell but what you could do here is take a uh one step over but go right to the direct of what is the CPI going to be and utilize that as the hedge. Is that that's something right? >> Yeah, absolutely. So, it's it's it's a straight cut to to where you want to go and not uh try to bet on the consequences. >> Yeah. That's fascinating. It's great stuff. Yeah. >> So, um and this this is this is this is um what's really great about Interactive Brokers. By the way, uh for those of you who have never seen this in action, you could do this pretty much all in one account. It's it's not like you have >> Of course, it's all in one account. Everything we do is our customers just have one account. They do securities, commodities, foreign exchange, options, futures. Um, >> but that you say it like it's really easy that a lot of other firms not so easy. They make you open up 14 different accounts. >> Yeah, we have all those 14 different accounts behind the scenes. >> Right. That's what I'm talking about. >> We save that for our customers. We just give them one account to see, >> right? Love it. >> Right. And we do all the bookkeeping. >> That that's that's so great because >> right >> as as I could tell you as being in the business as long as I have trying to reconcile all these different places at once for a client clients sometimes can't even look at one account. >> You know, it's hard enough for that. But having them look at 14 different 10 five two is very very difficult. One of the things that I found really interesting in a recent discussion I had with some people at IBKR is that in 2025 clients outperformed the S&P 500 right you were individual clients did about 19% registered investment advisor over 20 hedge funds nearly 29% which is great for hedge funds by the way so what do you think explains that is the tools the type of investors attached or something structural in your platform >> so I think the primary is the best execution. So, the best prices we are able to get for our customers. But don't forget this these statistics only include customers who have started the year with $50,000 or more in their account. And the hedge funds only the hedge funds that have started the year with a million dollar or more in their account. So, uh, smaller smaller customers, I don't know how well they've done. Maybe they haven't done that well. So I'm I'm so it I always like to specify that I want people to understand that these stats are for people who have had more than $50,000 in their account with $50,000 of value in their account on the first day of the year. >> But I think I think okay still with that not I don't think we it's still pretty impressive. >> Yeah. Sure. So, so >> it's very impressive. >> But you're thinking Beex's execution. Just that little sliver, that little extra amount that actually goes into the actual deal is is actually our clients trade very often and especially option traders, right? And and and also that the fact is that that much of that good performance has come from options. So people who trade options uh people who have a portfolio and and they trade options against the long stock and uh so they add additional yield to their portfolio. >> But also I think that one of the things I know because I get a lot of uh I get a lot of emails and I got a lot of popups and I got a lot of things and alerts like hey by the way be careful with market orders. Be careful market orders. Be careful market orders. Even if I don't use market orders, it's like always popping up and I think >> but please use market orders because you know obviously I mean why why when you want to buy something why pay what is being asked? Why not try to negotiate right? >> Right. >> So a limit order basically is a way for a trader to negotiate the price. >> Right. Exactly. Right. Exactly. So, this is something that you really push and I think that that's an important thing for a couple of reasons because I don't I don't think your system would allow this. By the way, folks, what's really interesting is on a lot of systems you have uh market, limit, stop, stop, limit. That's it. That's the basically the four you get. There are so many choices on Interactive Brokers. There's mid-pric, there's negotiated price, there's algo, there's all there's there is I don't know, would I be right to say there's like a dozen different 10 different options to choose from when you're actually doing this? >> Well, at least. Yeah. >> And that so you need to know that. But what happens there is the system, the algos, the computer brains behind this. What's happening is it's you're allowing the system to help you negotiate the price and get even better execution than quote unquote best execution. I don't know if that's a proper way to say Yeah, that's very well put. Yes. >> So, so what's interesting about this is that you especially if you're if you're an adviser, for example, and you're trading on a, you know, for your clients and you block trade. And what's really cool about this is that it's a one-stop shop. You could say, "Hey, I want 5% of Apple in my all my client portfolios or by by these 10 portfolios. I want 5% Apple in this portfolio." You click the button, you click the particular buy sequence that you want, whether it's algorithmic trade, whether it's a you you could do things like, you know, blend in over time. You there's a variety of different things you could do, but let's just keep it simple. You say, I'm going to buy. When you buy, you automatically buy it. At that moment, once you buy, it is allocated proportionally to each of the accounts behind the scenes automatically. And each account is hit with a transaction fee that is uh also pro prrated according to the total buy. So you're buying one block. >> So So let me say this. So if you're managing 20 accounts and you are buying say Apple for the 20 accounts, we we do one order of Apple. We execute it maybe in many many stages but it's one order and we charge you commission for the one order >> and then we allocate it. If you buy an ETS, we ETF for all your clients, we only charge you one times 149. Not not ETF, mutual fund, right? We charge you once495. And if you want to allocate it to a,000 accounts, you still only pay once 14.95 for the whole lot. That's it. >> Yeah. >> So, yeah. >> So, it's really nice. And and then also going back to the allocation process, everybody gets the same price because you just wait for that order to be concluded and it's it usually happens quickly, but everybody gets, you know, $15.92 >> across the board. It prevents cherrypicking. You don't have to worry about that. So therefore, from a client compliance standpoint, you don't have to worry about something saying, "Hey, why did Joe get 20 cents less?" This all happens when I tell you in a blink of an eye, it's not funny. It is so fast, efficient. Then you can go back and say like we did recently, we go in and say, you know what, here's our orders. Here's what our account looks like. We're going to go to the rebalancer. Rebalances shows that I owe own 5% Apple. You know what? I've decided I'm going to take that down to 4%. I click 4%. I click the button. Oh, I don't have to think the everybody's exactly at 4% because I use fractional shares also, by the way. Thank you for that. Uh that's that may not seem like a big deal to people, but I'm telling you to keep portfolios even. Fractional shares are a beautiful thing and I have yet to meet a particular stock that I can't do a fractional share of. So you buy that. So everybody gets in my portfolio 4% now of Apple across the board at the same price I sold at. It's allocated instantly. Saves me literally our office. One trade could be 20 minutes per trade trying to allocate trying to deal with this making sure the compliance is right and all that. So wonderful stuff. Wonderful stuff. education big IBK ourr campus this is a a I I think you I I call it please don't be offended by this like the the SCI sims right a best the our best customer is an educated consumer right you know where for Sims >> that was that was uh for for the clothing shop right yeah our best consumer is educated whatever >> Sims right >> yeah Sims yeah sims where where I I stopped shopping there because they wouldn't give me the hangers >> I'm like wait I'm buying all this stuff you won't give me the hangers no they folded up I'm take it all back. I'm not buying it. >> That was their way of saving money. But but an educated consumer is your best customer. So that I think is the part of this whole >> IB IBKR campus, right? Which is this >> huge huge suite of educational content um and courses and webinars and and and I was on there by the I've taught uh on there before um financial literacy which I think is unbelievable because it is true that if if you and that's why I've been doing this podcast since 2007. If we teach people how to create their own sense of financial security they'll be so much better off in the future and we're just yeah you know selfishly get more clients but also just the the thousands of people that I've taught thousands and thousands between my books and the podcast. It is such a wonderful feeling when I get somebody tells me, "Hey, I'm retiring. Thank you for all the stuff you've done and you and you've you've taught me on your podcast." And that's kind of like where you are here, too, right? >> Yeah, you're absolutely right. I mean, I meet customers almost every day. I run into somebody who says, "Hey, I'm your customer." And I'm always so happy when I meet somebody. >> So, so the teaching that you do, um, there's there's a broad range, right? You talk about strategies, market mechanics, not only IBKR platforms, right, and tools, but teaching them about Black Scholes. By the way, I'm going to go back for a second. You developed on your own pre-Black Scholes, didn't you? >> I did. Yeah. >> Which is, by the way, just so nobody don't know about this. It's an options pricing module uh mechanic um options pricing methodology that understands like uh you know, strike price, volatility issues, all that. But you were so there is we have on our website something called probability lab. >> Probability lab. Okay. >> And and you can go there and see and and you see what what distribution what probability distribution the current option markets imply for any specific stock. >> Mhm. So, so um again this is not just limited to options. There's so many different things that are out there. Um you also have IBKR invest mentor. This is um more learning for that's for beginners. >> Yeah. This for the youngans. >> Yeah. >> And that and that helps him because of course those youngans are always going to be youngans. >> Yeah. And that's for young young people and they are you know they don't have to be customers to to avail themselves of that. So there are a series of of lessons very short two 3 minute long lessons and people in their teens can learn all about um the economy the markets how how how free market economy works and everything about it. So you also have portfolio analyst by the way which you don't another thing that you don't have to have an account for. You can you can take a look at that and there's other ways that you can uh put all your portfolios from different places together. I mean just the wealth of offerings it seems like it it's it's it's never ending it which is great right. I mean obviously something's work. >> We're still working on >> you're still working. Oh I get that. And and and then you're always working and tweaking >> uh what you're doing and I mean I think that is just amazing. you've made an incredible mark on the investment world and and I'm and I'm so happy uh to finally meet you and >> thank you very much. You're you're incredibly flattering. Thank you. >> It's great. It really is great. So, in closing, um anything else that you want to talk about? Some of the things that are happening, some of the exciting things that are going on in the world of investing or or >> Well, of course, there is this war going on, right? And and of course I I'm I'm I think and I'm very hopeful that it is going to end very very soon and that we'll be victorious. >> Yeah. >> And uh so the oil prices will come down to $50 again and uh I think the market is going to turn around and go up >> during during these kinds of periods. Um do you see a very heightened amount of uh you know like darts and and and transactions? I'm assuming you do. >> Yes. For the past uh uh couple of weeks, we had a a yeah about four four close to 5 million trades a day. >> Wow. Wow. I mean, these are the things that people get nervous about and all, but I I think as I'm looking from afar, just stepping back a second, looking at these markets, they're a lot calmer than I would have expected. you know, I I would have thought that, you know, you you pop into 116 would have been a 5% move. I mean, Korea, for example, because of course they're more reliant on the oil, uh, and all that, but, you know, generally speaking, I think that the markets kind of get that a lot of this stuff is I don't want to say temporary, but at least situational. >> No, I I temporary is probably the right word. >> Yeah, it's interesting. So, we'll see what happens. We'll see what happens. >> Transient. >> Oh gosh. Oh gosh. Oh, no. Not that word. That's that's it's a minefield right there. Uh we're going to have all the information on uh Thomas Pedy uh and also on Interactive Brokers on the show notes for episode number 964. Yeah, Thomas, we've been doing this since 2007. >> I'm proud to be number 964. Thank you. >> Thanks so much. I'll see you again soon. >> Great. Thank you very much. >> Thanks. Wow. I've done a lot of interviews in my day. I got to tell you something. Hundreds and hundreds and hundreds if not in the thousands of interviews over the time on the various podcasts that I've done. And that was one of my favorites right now uh of the recent memory talking with a gentleman who is a self-made success story that has built such an incredible platform that has spanned decades competed against the big boys in the early days became a big boy in its later days and is giving so much back to the education in and and the abilities for not only hedge funds but individual traders to do the things that they do. Seriously, you got to respect something like that. You got to listen to what he has to say and you got to appreciate what is going on here and the opportunities that he has given all of us. So, uh, you know, even though, uh, he's not listening right now, I thank Thomas Pedy again for that. And, uh, want to want to say that that was that was something. Hopefully, you all learned a lot from that about the ability to succeed through hardship, hard work, discipline. And we're going to leave it at that. Thank you for joining me this week. Next week, we have coming up, who do we have? David Gaffin, uh, is coming up, Howard Linden, and then Thomas Thornton. all in a row. Great names, great minds, great ideas, and going to give us some great opportunities right now through all the mess that we're seeing right now with regard to the oil markets, the straits of Hormuz, geopolitical tensions, concerns, stock markets moving all around. It's time to keep your discipline. Understand who you are. Understand where you want to go, what you want to be, and make sure that you are are are are focusing in on the goal, not on where you are right now. Thanks for joining me this week and every week. I'll see you again real soon. This podcast is intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowits and Company, Inc., an investment adviser registered with the US Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. Advisory services are only offered to a client or prospective clients where Horowits a company is properly registered or is excluded from registration requirements. 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