Business
#402 Thomas Peterffy: The $80 Billion Founder Who Automates Everything
In episode #402, we explore the extraordinary life of Thomas Peterffy, the $80 billion founder of Interactive Brokers, who revolutionized automated trading. From his humble beginnings in post-war Hung...
#402 Thomas Peterffy: The $80 Billion Founder Who Automates Everything
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Interactive Transcript
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Before a few days ago, I didn't know who Tomas Petterfee was and I was shocked to learn that he's 81 years old.
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He's worth $80 billion and he's built his $120 billion company, Interactor Brokers,
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into one of the most efficient companies in the world. So for example, in 2024, they generated 3.7 billion in profits
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on just 5.2 billion in revenue. And I discovered Petterfee by reading this incredible profile about him
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that was written by Colossus and actually couldn't put it down and immediately called my friend Patrick
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who's the founder of Colossus and I told him that I wanted to make an episode on Petterfee's incredible life story.
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So that is what this episode is about. I want to get right into the profile which will be linked below
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and is written by Dom Cook and so Dom writes, I'm at the $108 million Aspen House of Tomas Petterfee.
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Once inside I find Petterfee hunched over his chair, his piercing eyes look up at me in confusion as I was introduced.
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I thought we were doing this over Zoom he said, my stomach dropped.
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Where have you come from he asked? London? That's crazy he said as if I'd come by boat
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to a man who has spent the past 60 years automating as much of his business as possible
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to the point where Interactor Brokers has 71% profit margins. My journey to meet him was an absurd
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misallocation of resources. Petterfee is the 23rd richest person in the world. He pioneered
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automated trading and built one of the largest options market makers on earth. He is the reason
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that you can trade stocks in your pajamas. His second act Interactor Brokers is worth over $100
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billion dollars. I was surprised that he was surprised that anyone would travel to hear his story.
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He settled down in his chair and began to explain how he got his start in life by dragging a metal
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bathtub through the rubble of post-war Budapest. I was born during a Soviet bombing raid,
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Petterfee began. It was September 30th, 1944, and the Red Army was pushing into Hungary. He remembers
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nothing until he was five, by which time Hungary belonged to the communists and his father had
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vanished, having divorced his mother and fled the country when Petterfee was two.
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I often remember my mother crying and I'd ask mom why are you crying? And she'd reply,
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we're going to starve to death. And she was dead serious about that. At school,
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Petterfee had no hope, but his grandmother's library had survived the war, and through the 19th
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century French classics written by Bolesac and Hugo and Zola, he learned about capitalism.
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I always wanted to make some money because we didn't have any, he said. At 12, he went into
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business with a classmate who returned from Austria with packets of gum. Petterfee took out a knife,
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cut each stick into five pieces, and worked the schoolyard until they were sold.
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The principal, upon hearing about his venture, confronted him, where is your communist conscience,
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he said. A year later, he was organizing platoons of children to hunt for metal in bombed out
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buildings. 70% of Budapest had been hit during the war, and Hungary desperately needed steel.
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Signed throughout the capital offered to buy scrap by the pound, once we found a humongous metal
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bathtub, which was incredibly heavy. It took eight of us all afternoon to drag it to the
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way station, but we got a lot of money for it. When Petterfee was 21 through what he called a
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series of very, very lucky mistakes, he managed to secure a short-term visa to West Germany on the
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premise of visiting distant relatives. From there, he walked into the American consulate and
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applied to immigrate. When the papers came through, he bought a one-way ticket to New York City.
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Each month, throughout his childhood, a letter had arrived from America, this letter was from
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his father. Petterfee paid little attention to the words, what interested him was the envelope,
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and in particular, the green stamp showing the statue of liberty. America had those stamps for
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something like 30 years, he said. That was extremely effective advertising. On December 12, 1965,
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he landed in New York. He remembers a building in the middle of the street. It was the New York
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general building, and it straddled the avenue as cars moved under its arches. He learned why it was
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there. The New York Central Railroad had dug beneath the avenue to lay the railway. Then they used
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the space above to build its headquarters. For a young man who had grown up in a world defined by
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limits, the building was proof that in America someone could take an established system and simply
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build over it. He soon found work at a highway engineering firm earning $65 a week drawing
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roadmaps. He spent his days converting surveyors field notes into highway drawings,
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plotting elevation changes, sightlines, and banking angles for new roads.
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Routine calculations could take up to 20 minutes, yet in the corner of the office
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set a $3,000 solution that nobody wanted to touch. The OliveVetty Programmer 101 weighed 20 pounds
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and looked like an oversized cash register. It was one of the first desktop computers. When
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Petrifi volunteered to tackle the unused machine, nobody objected. I figured it would be
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easier to learn than English, he said. The computer performed basic arithmetic and printed
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results on paper receipts. It could also store simple programs. The first night, Petrifi took
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the manual home, and he was relieved to find it contained only 100 English words. The rest was
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equations and diagrams. The machines logic immediately appealed to him. Break each calculation into
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steps, record those steps on a card, feed the card into the slot, enter the surveyors numbers,
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and receive an answer. Petrifi began writing his first programs when a card finally worked,
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he labeled the function and added it to his growing stack. Within weeks, he had built a library
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of programs for the office's most common calculations, what had taken 20 minutes by hand,
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now took 30 seconds. This idea of using technology to automate and improve your work is exactly
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things for your customers. Get started by going to ramp.com, so let's go back to the story.
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Each morning, Draftsman formed a line at Petrifi's desk as the machine chattered away next to him.
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It's printer unfurling solutions to his colleagues' problems. I was very proud of myself,
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Petrifi said. And so at this point, he's just working for an engineering firm, there's a series
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of people that he's going to meet that is going to change the trajectory of his life.
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The first one was a fellow Hungarian when someone mentioned Janos Arani, a Hungarian who's making
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money helping Wall Street firms learn how to use computers. Petrifi went to Arani's office and
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asked for work. The consulting work introduced Petrifi to finance. Most clients wanted the same
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reports that compared securities across various metrics like price to earnings, book value,
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and earning growth rates. Petrifi wrote programs and waited as the machine hummed and clicked through
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the calculations. The results emerged, he organized them into folders and then delivered them to
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the clients each week. And so then Arani is going to introduce him to another person that's going
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to change the trajectory of his life. One day Arani mentioned an unusual client. I know this crazy
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psychiatrist who wants to do some computer work you should meet him. That psychiatrist was Dr. Henry
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Jureki, a former Yale professor who had left medicine to establish the American operation of
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Makata and Goldsmith, one of the world's leading bullion trading firms. Petrifi arrived at Jureki's
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office armed with a book called Gold that he had been using to learn about commodities. Jureki
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explained his observation that the price of silver was volatile but stayed within defined boundaries.
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He wanted somebody to write a program that could model what would happen if they bought every
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down tick and sold every uptick, profiting from silver's nervous energy. To answer Jureki's question,
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Petrifi needed data so he goes down to comics which is the commodity exchange and this is what he
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finds. He found a prehistoric setup. Reporters seated in a circular pit dictating prices through
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radio headsets to clerks on scaffolding who scrawled numbers on the walls. At days end, the prices were
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copied to paper so once I learned about Tomas Petrifi not only did I read this profile but I read every
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interview I could find with him and every other profile about him. And in another profile I discovered
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one of the most important sentences that I think is key to understanding Petrifi and what makes him
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personally interesting to me. And he said on Wall Street, I feel like I'm Alice in Wonderland.
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Nothing makes sense. Everything is mixed up and different than the way that I think it should be.
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And so Petrifi's assignments are very simple. Trade, silver and try to make money.
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And Petrifi has no idea how to do this. He says I had a horrible time. How do you decide when you're
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going to buy and how do you decide when you're going to sell? He had no framework for decisions,
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no system beyond intuition that he did not possess. Jureki also had a larger vision but we will see
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not as larger vision as Petrifi had. Jureki wanted his nascent business to become a Boolean dealer
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quote in continuous silver and gold prices to banks and traders in New York, London and Hong
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gone. The exact problems that a computer could solve best. Petrifi designed the system from scratch.
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So there's another quote in one of these other profiles that I read about Petrifi where he he talks
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about that he does not consider himself a trader. He says I'm a computer programmer and so are all
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the most important people in my company. So it says Petrifi designed the system from scratch.
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Petrifi's programs ran the data through proprietary equations and printed fresh bid-ass quotes on
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green bar paper. Runners then grabbed the sheets and raced them to the trading pit where clerks
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gave live prices through hand signals. Other firms relied on their traders intuition.
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Petrifi built a machine that ran on math and so keep in mind what I'm about to read to you. He's
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a magazine about this system that he just created. It's going to take a more than a decade and a half
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of trial and error to figure out how to do what he's saying he wants to do, which is as soon as this
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electronic brain is hooked up to its voice box so it can answer the phone staff will be able to go
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on a permanent vacation. His words reveal how clearly he saw the future. As Jureki's company became
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one of the most powerful commodities firms in the world, Petrifi's influence grew. By 1976 he
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commanded a team of 80 programmers, one of the largest financial coding operations in the world.
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And Jureki began bringing him into meetings that had nothing to do with software. Jureki never
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entered an important negotiation without him. In rooms full of traders and executives, Jureki would
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defer to Petrifi. But their partnership began to fracture later that year when Petrifi visited the
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Chicago board options exchange. Traders were making prices out of thin air. bid-ass spreads stretched
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two to three dollars wide in efficiencies that dwarfed anything in the precious metals market.
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And as we're about to see, the mistake that Jureki makes is trying to constrain Petrifi's what I
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would say, obviously, unlimited ambition. When Petrifi proposed expanding into stock options,
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Jureki refused, preferring to remain a precious metals dealer. And it is at this point in the story
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where Petrifi realizes that Jureki is stopping him from seizing an opportunity to grow. Successful
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Vanta.com, Ford slash founders, and you will get a thousand dollars off. That is Vanta.com,
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Ford slash founders. So Jureki does not want to expand in options, but Petrifi does. Petrifi had
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used his computer to invent a partial differential equation that priced options based on variables,
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such as the underlying assets price, volatility, and the options time to expiration. He had been
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testing the formula inside of Jureki's company quietly on silver options and making money on almost
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every trade. That success made Jureki's refusal more frustrating. And this is so important.
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The importance of seeing somebody else succeed in realizing if they figured it out, I could too.
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Over seven years, Petrifi had watched his boss become known as the Dean of the American Gold Market.
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When I asked what Jureki had taught him, Petrifi didn't hesitate. He was a very well-educated man,
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but he was a psychiatrist. He didn't know anything about markets. I realized if he can figure it out,
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so can I. He has another great quote and another profile about Jureki. He says, I learned, he was talking
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about what he learned from him. He says, I learned an immense amount about how markets worked.
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The best lesson was to not let my mind become clouded by conventional wisdom. For the first few
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decades of Petrifi's career, everybody thinks he's crazy. They say over and over again, that guy's
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mad. His ideas are too strange. So Petrifi is going to leave Jureki and start on his own in
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1977 with $200,000 in savings. Petrifi left and bought a seat on the American Stock Exchange
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for $36,000. So he's in the pit with all other traders and immediately he's doing things his own
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way. Petrifi had folded his computer-generated sheets into precise squares and distributed them
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among his pockets. IBM went into his breast pocket, Dupont and to his left trouser pocket.
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Another company had his back pocket, so on and so forth. When prices moved, he would duck his head,
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fish into the appropriate pocket, consult his numbers, then surface to make his bid. The other
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traders watched this performance with fascination and growing unease. That sentence, the meaning behind
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that sentence, was repeated over and over again throughout his early career. Some of the stories in
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this profile are insane. We too, we get to them. He was treating the trading floor like a chemistry
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experiment. People thought I was mad, he said. Again, something he hears over and over again,
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but he was comfortable enough trusting his own judgment and thought they were the mad ones.
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And so of course, at the beginning of anything, you're going to make a lot of mistakes. And so he
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actually loses half of his capital. He's trading his own money. In a few minutes on a single bad
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trade that he has convinced was actually the result of insider trading. And so he starts to be a
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lot more careful and starts hedging every single trade between 1977 and 1982. Petrifi slowly
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rebuilt his capital, one careful trade at a time. He stuck religiously to his fair value sheets
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and made sure to hedge all of his trades. He also began hiring others to execute his ideas.
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By 1982, his operation had grown large enough to deserve a name, Timber Hill. So this is his first
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company. The second one is going to be interactive brokers. That same year, Petrifi tore several
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ligaments in his knee through a series of accidents. He found himself unable to stand on the trading
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floor for long periods. Confined to his office, Petrifi spent hours watching his Quattron machine,
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a beige box that pulled up one stock price at a time over a dedicated phone line. He asked Quattron
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to sell him the data feed. And when they refused, he helped himself cutting the wire and attaching
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on a silascope. I had to look this up on the skill. A silascope is an electric test instrument
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that visually displays the variation of voltage over time. So listen to this. I want to buy your data.
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You say no. And it says he helped himself. He essentially hacked the system, cutting the wire and
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attaching the silascope. The associate got on his desk like a small television with a grid hashed
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over its face. When he attached the probes to the severed line, green traces swept across the
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screen, displaying the electrical pulses carrying each stock price. This is insane. Every number had
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its own signature in spikes and dips. He studied the patterns, matching each trace to the
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prices appearing on his Quattron. Maybe they were right. He was a mad scientist. He is a mad scientist.
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Soon, his computer was being fed price changes across the entire market in real time. This is the
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early 1980s. With that stream of data, his algorithms could spot profitable options trades
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faster than anyone else. But he still needed humans to execute the instructions on the floor,
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which meant dealing with the specialists who controlled orderflow. And in that clubby world,
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Petrifi was not one of the boys. His solution was calculated. He hired six tall, beautiful women
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to trade for him. The specialist who had ignored his bids suddenly fought to fill his new employees'
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traits. Which Petrifi was delivering by phone. Everybody loved the women he said. We were making
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money hand over fist. And so there's, I know Dom Cook, the writer of this profile. And so I asked
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Dom to send me as much background information on Petrifi as possible to help me make this episode.
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There is a story that did not make it in the profile, which is nuts. And it's exact, it's about
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this time in Petrifi's career. So it says in 1982, Petrifi was out to dinner on the upper
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side with a friend. When they walked into the restaurant, three men at a table knew their
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entrance spotted his friend and invited them over. All three of the men sitting at the table
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worked in show business. Petrifi knew none of them. One was Aaron Russo, the film producer,
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another was Melvin Van Peabulls, the filmmaker. Russo turned to Petrifi. So what do you do?
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Petrifi explained that he was a traitor, but that he had injured his knee and couldn't stand on
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the floor anymore. So he hired attractive women to execute his traits. They took instructions
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over the phone and relayed them to specialists on the exchange floor. You mean anybody could do this,
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Russo asked? Petrifi shrugged. Theoretically, yes. Russo put his hand on Van Peabulls' shoulder,
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the filmmaker, okay? You mean Melvin here could do it. I think so. I'll make you a $10,000 bet,
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said Russo. You hire Melvin. If he lasts a year, I'll pay you. Petrifi agreed. Melvin went through
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Timber Hill's two week training course, learning to take Petrifi's instructions and relay order
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to the American Stock Exchange floor where he quickly gained popularity. He spent a full year
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training for Timber Hill and did a fantastic job. Petrifi collected Russo's $10,000. Here's the
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insane part. A year later, Russo produced the movie Trading Places, starring Eddie Murphy and Dan
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Acroid, which is about a wealthy broker and a street hustler whose lives are switched as part
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of a bet by two rich financiers. The film earned $120 million in its first year. That takes place
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exactly where we are in the story, back to the story. The honeymoon ended when the specialist finally
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grok'd what was going on. They delivered an ultimatum. If Pefferty wanted to keep trading, he would
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have to become a market maker, maintaining constant bid and offer prices instead of cherry picking
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only the most profitable options to trade. Market making required split second responses to price
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movements. But his traders took their orders from algorithms running in his office. How could they
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make markets without direct access? And as he does with almost every problem throughout his career,
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he comes up with a novel solution in 1983-27 years before Steve Jobs unveiled the iPad.
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Petrifi invented the first handheld trading computer. He built rectangular boxes each about the
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size of a hardcover in cyclopedia, inside where rows of transistors and circuit boards powered
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on a crude touchscreen. Each morning, Petrifi lined up the devices along his desk, plugged them in,
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and uploaded fresh market data and options prices. Then he handed them off. On the floor,
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when specialist demanded quotes, his traders glanced at their screens, answered with prices,
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and tapped again to log the trades. But the cycle required constant feeding after five trades
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the devices had to be updated. The clerks would sprint the two blocks between the American Saka
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Shange floor and Petrifi's office, carrying the computers and satchels. He would upload the trades,
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recalculate exposures, feed in new prices, and then send them racing back. The American stock
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exchange reluctantly agreed to allow the devices. But when he attempted to bring the tablets to the
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Chicago board options exchange, the response was unequivocal. They actually passed a rule that
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analytical devices may not be used on the trading floors Petrifi said, I mean, how can you say such a
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thing? In 1985, Petrifi turned to the New York Saka Shange struggling options division. They were
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hungry for volume and open to concessions. Petrifi's devices were banned in the pits, but he could
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install monitors. So long as they were mounted along the back wall of the trading floor,
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30 feet from the action. So there's so many times when you're reading this profile, we just
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realized that one of his gifts is created because of the absurdity of these arbitrary rules
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are constantly put upon him. Petrifi has to successfully navigate multiple different environments full
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of arbitrary, illogical rules. And so they throw up another impediment and he figures out a way
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to route around it. The distance made real-time trading impossible. I was desperate at this time,
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Petrifi said. That weekend at his house, he sat alone in his kitchen table, staring into a mug of
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colored pencils. He picked one up and set it back down, red, then green, then blue. What if each
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morning he rewrote the code, creating a psychedelic light show that his traders could read from across
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the room and put on that giant screen that's 30 feet from the action. People took a day or two to
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learn the colors he told me. There's actually a picture of this screen in the profile. It looks
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incredibly confusing to me. In 1987, Petrifi achieved what he had first dreamed of in 1971, so
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it's 16 years of trial and error. The first fully automated trading system in Wall Street history.
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His machines could now place trades without human intervention. An achievement made possible not
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on the floor of a traditional exchange, but through the NASDAQ, a new, quote-driven network that
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operated without pits or clerks and just screens an essential matching engine. Now the way he built
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the very first automated trading system in Wall Street history is going to be very familiar to you and
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he's going to hijack the data. So a NASDAQ employee who was making a routine visit to one of
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its fastest-crowing clients' office sees that there's no human insight. Unbeknownst to NASDAQ,
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Petrifi had hijacked the terminal's data line. For most traders, the terminal was just a screen
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and a keyboard, a way to type in orders, one at a time. But Petrifi had wired it into his own computer,
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pulling live prices straight from the feed, running them through his algorithms and sending trades
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back out through the same cable. The NASDAQ employee gave him one week to make it right.
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All trades he insisted had to be entered by a keyboard and typed one after another just like
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everyone else. And so go back to his quote-driven algorithm. He says on Wall Street, I feel like I'm
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Alistair Wonderland. Nothing makes sense. Everything is mixed up and different than I think it should be.
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And so in Petrifi's view, he has NASDAQ trying to make his system worse. Listen to what he does here.
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This is probably the funniest thing the ever does. His guy is so crazy.
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Petrifi and his team worked every night for a week. They mounted a camera above the terminal screen
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to read the prices, then built a frame of metal arms and tiny motors suspended above a keyboard.
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When the computer spotted a trade, signals fired through his invention and the metal
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fingers began to type like a mechanical spider. When the NASDAQ man returned, he found an office
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transformed. The suspicious silence was gone, replaced by the violent percussion of automated typing.
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Petrifi's creation attacked the keyboard in bursts. Radatattat, pause. Radatattat, pause. Radatattat,
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each sequence spelling out by and cell orders faster than any human could think, let alone type.
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The employee watched in silence and then left without a word. He did not like this one bit,
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recalled Petrifi, who offered to install a mannequin operator complete with moving arms.
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The system survived, and despite a few hiccups, including a $3 million loss,
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when a drafty door triggered phantom trades on a backup device, Timber Hill made $25 million
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that year, and $50 million the following year. Remember, this is in the 80s. By the end of the
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decade, Petrifi's market-making network stretched from New York to Chicago to San Francisco,
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then overseas to Frankfurt, London, and Hong Kong. Goldman Sachs made repeated acquisition offers
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that climbed to as high as $900 million. Petrifi turned them all down. When pressed for his price,
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he said $3 billion, a quiet way of ending the conversation he wasn't selling.
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He was building his most ambitious hack yet, a platform that would give ordinary investors
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the same technological advantages he had created for himself. In 1993, he launched Interactive Brokers.
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This is one of the craziest lines in the entire profile. For the better part of the 1990s,
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Interactive Brokers was an elegant solution to a problem that didn't yet exist.
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The infrastructure was ready. The technology was sophisticated, but the market,
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particularly in the United States, remained stubbornly analog. Around the turn of the millennium,
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the great automation of American exchanges began to accelerate. Nasdaq had been born electronic,
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but now the most traditional bound exchanges were surrendering. Even the New York Stock Exchange
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was giving way to the home of computer servers. Wall Street was becoming a screen-based business.
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The floor traders who had once mocked Petrifi's folded sheets and handheld computers found themselves
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staring into obsolescence. This worked to Petrifi's advantage. They knew that I was an honest
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businessperson, and they needed a way to continue their business on a computer from their office,
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so they became our customers. And that is how Interactive Brokers became the broker for professional
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traders. As Interactive Brokers began its ascent, Timber Hill entered in its twilight.
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The technological and analytical revolution that Petrifi had pioneered was evolving beyond his
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original vision to become a speed contest. By the mid-2000 market makers like Citadel were spending
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hundreds of millions of dollars on microwave towers and fiber optic cables in a bid to shave microseconds
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off execution times. Timber Hill was left with their exhaust themes. When I asked why someone who had
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spent his entire career pushing technological boundaries suddenly refused to push further,
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Petrifi first offered a practical explanation. I thought it would cost me billions of dollars,
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he said. Before something more honest emerge, I also felt that I knew everything there is to know
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about market making. It was not interesting to me anymore. His eyes then brightened as he continued,
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but how to build the best platform for people to trade? That was a challenge. In May 2007,
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Petrifi took Interactive Brokers public, Timber Hill still generated 80% of the company's revenue.
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The IPO wasn't about raising capital, he owned close to 100% of the business,
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having built it with Timber Hill's cash flow. We needed advertising for Interactive Brokers,
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he said. I thought it would put the company's name in the public domain. And so when he says
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putting your company name in the public domain, he's talking about advertising, he's talking about
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marketing and the best marketing and advertising is storytelling that is exactly what my partner
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collateral does. Learning to tell stories incredibly important because that's how the money works,
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the money flows as a function of the stories and that is where collateral comes in.
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Collateral transforms your company's complex ideas into compelling narratives. Collateral
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crafts, institutional grade marketing collateral and they do this for private equity, private credit,
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real estate venture capital, family offices, hedge funds, oil and gas companies, all kinds of
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corporations. I have friends that have used collateral for their marketing collateral and have
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raised billions of dollars of capital and have made hundreds of millions of dollars. Make sure
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you go to collateral.com and improve the way that your company tells its own story. Storytelling is
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one of the highest forms of leverage and you should invest heavily in it and you can do that by going
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to collateral.com. So now we go back to Petrifi taking his company public. And of course he's going to
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do it in his own way. Rather than pay the substantial fees demanded by investment banks, he chose a
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Dutch auction and hired an obscure firm to less 10% of his business. This saved him 80 million dollars.
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It also meant no roadshow. He then kept building by 2017 interactive brokers had so thoroughly
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eclipsed Timber Hill that Petrifi shut down the market making operation entirely ending a 40-year run
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that had once made it the world's largest options market maker. What remains is a tightly
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engineered machine, a pure play brokerage with 4 million customers over 700 billion in client assets
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and just 3,000 employees. Most of them engineers. In 2024 it generated 3.7 billion in profits on 5.2
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billion in revenue. The company he took public at a 12 billion dollar valuation is now worth over 120
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billion. The firm runs on Petrifi's original premise, automate everything. That ethos drives the
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business to charge fees so low that rivals no longer try to compete on price. Interactive brokers
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remains the platform of choice for hedge funds and professional traders. What's the secret I asked
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as our discussion wound down? It's all common sense, Petrifi said. Hard work and common sense is my
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story. I brought up Costco, a comparison that investors like to make. Both companies are built on
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the radical notion that you can make more money by charging less. Petrifi replied, I've never been to
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Costco, he said. I've never read a business book. In 2019 on his 75th birthday, he stepped down a CEO,
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but retirement is out of the question. He's 81, chairman of Interactive Brokers still owns nearly
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70% of the business and said he's sort of running the sales and marketing department because nobody
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wants to do it. I really know nothing about it, he said, so I'm learning as I go. When I ask
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him what he's most proud of, he thought for a moment. The money that we save people in getting
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markets to be more efficient. Then Petrifi suddenly straightened. I hadn't checked the markets,
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he said, turning towards his screen. We're up a buck 44, he announced, not bad. I stood up, thanked
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him for the time and let myself out of the house, doing the math of my head. During three hours we
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talked, Petrifi had made 1.7 billion.