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Father of high-frequency trading Peterffy is worried about US inflation, which h

2024-06-17

On Wednesday, Thomas Peterffy, the founder and CEO of Interactive Brokers, the largest online brokerage firm in the United States, and known as the "father of high-frequency trading," expressed concern about the inflation outlook in the U.S. His remarks have caused a strong reaction in the industry.

Previously, the U.S. Department of Labor released the Consumer Price Index (CPI) for April, which was much higher than expected. The U.S. April CPI increased by 4.2% year-on-year, the largest year-on-year increase since September 2008. Excluding food and energy prices, the core CPI increased by 0.9% month-on-month, the largest increase since April 1982.

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Peterffy cited his personal experience in Hungary after World War II as a basis. Peterffy said, "Every time I hear such data, I think back to my childhood growing up in Hungary, where I played with 10 billion forint banknotes that were meaningless." Peterffy is "worried that this is a situation that cannot be stopped."

Began the legendary gold rush on Wall Street at the age of 11

Peterffy's remarks have attracted attention in the industry because of the influence he has built over the years. As the founder of Interactive Brokers, the largest online brokerage firm in the United States, Peterffy is not only a renowned investment master but also a recipient of the Lifetime Achievement Award at the U.S. Options Industry Annual Conference. His personal experience is also legendary.

In 1944, during World War II, Thomas Peterffy was born in the basement of a hospital in Budapest, the capital of Hungary. His childhood was filled with hunger and hardship, and he often had to move with his parents in the middle of the night to avoid debt. In 1965, he seized the opportunity to escape Hungary and came to New York, the United States, with nothing, starting his legendary gold rush on Wall Street as a Hungarian who barely understood English.

Wrote an algorithm for pricing options

In 1969, Peterffy joined the well-known New York financial market participant Henry Jarecki's Mocatta Company. Here, Peterffy thrived and was highly appreciated by Jarecki. Entering the 1970s, the volume of futures trading in the United States increased significantly, and Mocatta Company also began to actively participate. After continuous summarization and verification, Peterffy and Jarecki summarized several factors affecting option pricing, namely the option exercise price, the option expiration date, volatility, and risk-free interest rate. Peterffy spent more than a year writing an algorithm that uses all the above parameters to price options. Mocatta Company began to use this algorithm to trade options and achieved good results.

Peterffy is very cautious in option trading.In 1977, Peterffy began to "go it alone." In order to have a good start on the first trading day of the U.S. stock exchange, Peterffy worked 18 hours a day in front of the computer, perfecting algorithms and drawing up tables to guide his buying and selling of futures in the trading hall. He painstakingly studied those companies he believed had a large difference between futures pricing and actual value, and there might be pricing issues. For each company, he had to make a series of futures value tables corresponding to different stock prices of the company. When the stock price fluctuated during the day, Peterffy quickly consulted the tables he had made, calculated the reasonable price of the stock options, and traded based on this price. These tables were his paper version of the algorithm.

At first, Peterffy was very cautious in options trading, and his trading completely relied on the pricing provided by his own algorithm. If an option contract was not within his conservative profit range, he would never trade. However, once he found that an option of DuPont, a chemical company, was trading at $31, while according to his model, the option was only worth $22. Peterffy thought he had found a windfall and immediately sold 200 call options, waiting for the option to fall and make a big profit.

Unexpectedly, after the market closed, the company's quarterly report was better than expected, and the stock price soared, causing Peterffy to lose $100,000 in an instant, which was almost a fatal blow to a young trader with only $160,000 in savings. After this trade, he vowed never to engage in directional trading again and only to do hedging trades.

Pioneering in the development of automated trading in options through calculation

After the pain, Peterffy was not defeated by this failed trade, but instead picked himself up, accumulated funds step by step, expanded the trading team, and increased trading volume. Later, Peterffy's options trading grew larger and larger, and he pioneered the development of automated trading in options through calculation, and through continuous research and summary, Peterffy's trading profits began to rise sharply.

In 1990, Peterffy renamed the company Interactive Brokers (Ying Tou). On May 4, 2007, Interactive Broker successfully went public on NASDAQ. After the opening bell rang, his company was valued by the market at $12 billion, becoming the second-largest IPO in the United States that year. In 2012, on the Forbes list of the richest Americans, Peterffy ranked 77th with a net worth of $4.6 billion.

Peterffy is a pioneer of options programmed trading. Today, 60% of trades are automatically executed by computers without real-time supervision or very little supervision. Peterffy's story on Wall Street is unique, and the difference lies in the fact that he is a programmer, an excellent programmer. With his programming skills, mathematical knowledge, and the ability to write complex code, he created a layered algorithm, thus subverting a field that was very unfamiliar to him: the Wall Street exchange.