Peterffy, Refugee Pioneer of Electronic Trading, Bids for Refco
Oct. 21 (Bloomberg) -- Thomas Peterffy, a Hungarian refugee and self-taught computer programmer, was the first to use a trading calculator, then the size of a cafeteria tray, to outsmart rivals on the floor of the American Stock Exchange.
Two decades on, Peterffy's privately held Interactive Brokers Group LLC in Greenwich, Connecticut, is trying to outbid competitors in the $4.5 trillion-a-day global futures market as he seeks control of Refco Inc., the trader that collapsed on Oct. 17 amid a fraud probe.
U.S. Bankruptcy Judge Robert Drain yesterday said he'll hold a hearing Oct. 24 to authorize an auction of Refco's assets. Peterffy, 61, who has bid $790 million for Refco's regulated futures-trading unit, will pitch against New York buyout billionaire Christopher Flowers, whose $768 million bid was accepted last week by Refco, subject to the bankruptcy court's blessing. The purchase would vault Peterffy's ranking in the futures market to No. 8 from No. 41.
``He literally started with nothing and has built a multibillion-dollar enterprise,'' says Sandy Frucher, 59, chairman and chief executive officer of the Philadelphia Stock Exchange, where Interactive Brokers is one of the biggest market-making firms. ``He was the first to recognize the power of electronic trading.''
Refco, which collapsed within a week of announcing that former CEO Phillip Bennett had hidden $430 million of debts from auditors and investors, plans to submit papers today regarding the request for an auction, said the company's lawyer, Richard Levin. Interactive Brokers is the only bid so far to challenge Flowers's J.C. Flowers & Co. An adviser to Dubai's government has said his client is considering bidding as much as $1 billion for the futures business targeted by Flowers as well as other Refco assets.
Logger
Peterffy, a logging company surveyor before he fled communism at 21, has built the largest closely held U.S. broker-dealer by using technology to undercut competitors on trading fees and prices.
He helped build the Boston Options Exchange last year, one of only two entirely computer-based markets for the contracts. The exchange offers a three-second auction that is aimed at allowing customers to snatch bargains.
Interactive, which operates in 44 countries, is the largest stock-options market maker in the U.S. by transactions, according to Bill McGowan, a managing director for the company at its office in Chicago. Market makers stand ready to buy and sell in response to requests from investors, and they make their profit on the gap between the prices at which they trade.
Contraption
McGowan was an independent trader on the floor at the Chicago Board Options Exchange in the 1980s, when he first heard about Peterffy walking onto the floor of the American Stock Exchange with the first version of his computer. The device was strapped to him like an ice-cream vendor's tray, McGowan says.
Peterffy used the contraption to automatically calculate prices. Traders clutching large sheets of paper with prices updated just a few times a day felt he may have had an advantage over them, McGowan says.
``He brought down these handhelds, and we felt like we were being attacked,'' McGowan says. ``We were just being attacked by the future.''
An early model of the computer is encased in Peterffy's glass- topped coffee table in his office.
``He was trading markets electronically before people knew what electronic trading was,'' says Chicago Board Options Exchange CEO William Brodsky, 61. ``He really was an avant-garde in terms of where the business was going.''
Traders Suspicious
Brodsky was previously chief executive of the Chicago Mercantile Exchange. In 1985, Peterffy wanted to have his computers installed on the trading floor there and met resistance from traders, who were suspicious of the information being fed to their rivals, Brodsky says.
Peterffy cut a deal to allow the screens to face outwards, so anyone could see. But he color-coded the information so only his clerks knew what it meant, Brodsky says.
``I have spent my entire working career building computer systems to serve the needs of our brokerage customers and trading counterparts,'' Peterffy said in an e-mailed response to a request for an interview. ``We have the best technology in the industry and can provide a better and less expensive service for Refco's customers than our current or future competitors would.''
Investors trade futures and options to bet on or guard against swings in interest rates, commodities, stocks and other assets. Futures are agreements to buy or sell assets at a set date and price, while options provide the right to do so.
Surge in Trades
The amount of the contracts traded on exchanges worldwide surged 31 percent last year, according to the Bank for International Settlements in Basel, Switzerland.
Refco currently offers its own electronic trading system to customers. Peterffy wants them to use his platform. Interactive Brokers took full-page ads in the New York Times, Wall Street Journal, Financial Times and Chicago Tribune this week, inviting Refco customers to switch.
``He's one of the smartest men in the business,'' says Frucher at the Philadelphia exchange.
Frucher has rebuffed Peterffy as a buyer for his own business. The Philadelphia Stock Exchange rejected Peterffy's $20 million offer in August for a 20 percent stake, picking instead a lower bid of $18.75 million for 25 percent of the company from Morgan Stanley, Citigroup Inc., UBS AG and Credit Suisse First Boston.
Bouquet of Roses
On another occasion, Peterffy applied for a license to offer stock options on 50 listed companies as a so-called specialist, a company that undertakes to buy or sell on demand from investors. The exchange rejected Peterffy on all but one of the stocks, Frucher says, without saying why. Peterffy responded by sending Frucher a bouquet of roses: 49 white and one red.
The Chicago Board Options Exchange and other markets tried to block Peterffy's attempt to establish the Boston Options Exchange. By encouraging brokers to trade directly with their own customers, the Boston market creates possible conflicts of interest and degrades quality by eliminating the role of specialists, the Chicago exchange's Brodsky said after the Securities and Exchange Commission approved the market in January 2004.
Rival Bids
Peterffy and Flowers have limited their bids to Refco's futures units, including Refco LLC, Refco Overseas Ltd. and Refco Singapore Ltd. These businesses were left out of the bankruptcy filing. Flowers on Oct. 19 said he may also buy the company's securities, derivatives and foreign-exchange units. Interactive Brokers would only be interested in the regulated futures business, spokeswoman Isabelle Clary said Oct. 19.
Interactive's offer is equal to 106 percent of Refco's regulated cash, or the amount of capital in its futures-trading businesses. If Interactive wins the bidding at that price, Refco would receive $280,000 more than Flowers offered after paying a 2.8 percent breakup fee. The Flowers offer is 3 percent more than Refco's net regulated capital.
If the amount of capital declines, so would the dollar value of the bids.
Interactive Brokers has $2 billion in cash and ``significant liquidity,'' Gary J. Mennitt, a lawyer for Interactive, said in an interview Oct. 19. |
