Media

Essential Sipp Embraces IB Trading Technology

A recently launched investment vehicle from Britain’s Sipp operator, Stadia Trustees, seeks to promote the ‘treating customers fairly initiative’ and offer access to cost-efficient electronic trading methods. Stadia has teamed up with online trading provider, Interactive Brokers, to offer its “Essential” Sipp investment product. Stadia Trustees director Tony Hales says, “Through our affiliation with Interactive Brokers, investors will have access to the best electronic trading software which will deliver real benefits and provide peace of mind that we can provide access to the best and most cost-efficient online trading.” For investors well-versed in exchange traded funds and direct-share dealing, investors can access low-cost dealing at £6 a trade.

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Margin Expands Regardless of Rate

Barron’s asked the same group of brokerage firms it covers in its annual survey for a recent update on margin rates they charge their customers along with attitudes to trading on margin. The study found a “huge gap” in those costs facing investors, which “can make a big difference to an investor’s trading costs.” Interactive Brokers maintained its position as the least expensive trading venue for investors with its 1.63% funding rate regardless of whether the margin balance was $10,000 or $50,000 according to data collected by Barron’s.

An investor carrying a $10,000 margin debt for a month would pay $13.58 at Interactive Brokers while the same-size trade at TD Ameritrade would cost $72.92 per month. The difference for a $50,000 balance would amount to $245 per month according to data compiled for the study.

Andrew Wilkinson at Interactive Brokers attributes “some of the growth in margin use by our clients to the low financing costs available at IB,” noting an increase of 81% in margin use by customers of the broker.

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Futures and Options - Trading Across The Two Markets Remains Riddled in Complexities

U.S. investors continue to face challenges of having different regulators in place to govern futures and options trading. Despite their complementary features, varying bankruptcy codes and customer protection rules mean trading of futures and options products has to be performed in separate accounts thus creating challenges for investors seeking to coordinate trading and hedging strategies.

Agreement in 2007 between the NYSE, Nasdaq and CBOE approved 12 broker-dealers to offer portfolio-margin accounts permitting certain customers to benefit from cross margining, which considered offsetting trades within an account, which in turn lowered collateral requirements. Greenwich, Conn.-based Interactive Brokers has opened several thousand portfolio margin accounts. Its real-time system automatically institutes margin calls when collateral falls below a certain point, so it requires only the regulatory minimum except for some illiquid securities, according to Steve Sanders, senior vice president of product development.

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Interactive Brokers Review and Company Profile

Interactive Brokers "Universal Account" is the thoroughbred of trading platforms allowing the user to trade in eighty markets around the world from one account – it’s the perfect trading platform for the professional or the committed amateur. Established in 1977 the company offers the most sophisticated trading platform technology for traders globally, both institutional and individual. Its trading platform gives direct access dealing to stock and bond markets, futures and currency exchanges. Interactive Brokers rates are the lowest around for thee professional trader and the trade implementation is instant and accurate. Certainly Interactive Brokers gets good feedback when reviewed online by their users. At EliteTrader.com IB has a 77% rating out of 348 votes.

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The Long and the Short of It

Interactive Brokers is the latest company to announce a beta version of its iTWS trading application for the iPhone. Account holders can use iTWS to trade stocks, options, futures, futures options and warrants on over 80 global markets when they make use of the downloadable software available at the App Store on your iPhone.

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Brokers Enjoy a Productive Summer

Having started to offer futures and options trading on the National Stock Exchange of India in the spring, Interactive Brokers recently launched stock trading for local as well as non-resident Indians. Minimum commissions for stock trading runs at 75 Indian rupees or about $1.55 before securities transaction costs, exchange charges, stamp duty and service tax.

IB also rolled out its beta version of PortfolioAnalyst, allowing customers to slice and dice their portfolios and view over different time periods. “Essentially our plan is to create and give away for free the same functionality that is provided by third-party portfolio-management systems at a hefty price,” said Andrew Wilkinson at Interactive Brokers.

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Commodities: Best Inflation Hedges

For investors concerned by the tidal wave of government money aimed at bailing out the economy and what implications that might have on rising prices, Forbes Magazine suggests investors look to commodity producing companies with a significant amount of overseas sales. Agricultural and industrial commodities have performed well in periods of rising prices, while also having the potential to act as a hedge against the dollar. If your broker doesn’t handle foreign stocks or charges high commissions to do so, consider Interactive Brokers which executes trades on more than 80 exchanges across North America, Europe and Asia. European stock commissions run at 0.1% where investors face the same spreads as locals since IB connects directly to each exchange. For currency conversions on trades below $50,000 IB charges $2.50.

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Interactive Brokers bets on brokerage model for growth

Thomas Peterffy’s Interactive Brokers is making a strong and conscious effort to position itself as a broker and increase market share in the brokerage business. “We are pushing very hard on growing our brokerage business and have been advertising. Brokerage business is certainly growing much faster than market making business,” Peterffy told Reuters news. Within his brokerage business he said “our clientele is steadily increasing,” since the broker’s relatively less expensive system suits professional traders who need to minimize their transaction costs. Companies like Interactive Brokers, dependent on transaction revenue, have avoided many of the problems faced by other financial firms. The company intends to raise headcount by about 100 employees from its current 730 as it braces to take on more business. “We want to hire more software people, computer programmers and expand [our] sales force,” said Peterffy. He also noted the firm’s plans to expand its Asian presence, where it recently acquired a small brokerage firm in Japan, while it was also opening a Chinese office.

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Interactive Brokers plans Push Into International CFD Market

Interactive Brokers Group CEO and founder, Thomas Peterffy said he was making plans to enter the fast-growing international market for contract-for-differences, or CFDs, sometime during the next few months. The move could be an important revenue driver for Interactive Brokers, which specializes in serving professional traders. Mr. Peterffy pointed to the U.K. and Autralia as potential entry points for its launch of the equity derivatives.

‘We are working on getting into the CFD market in a few months,’ Mr. Peterffy said. The CFD market has grown strongly on account of preferential tax treatment that undercuts the cost of trading equivalent futures contracts. The products are available in Germany, Switzerland, Italy, Singapore, Hong Kong, South Africa and New Zealand. CFD’s are contracts where buyers pay or receive from the seller a difference in a company share price over time, giving the holder the benefit but not ownership in the stock. While popular in company’s shares CFD’s are also traded on currencies and some commodity products.

Interactive Brokers Scores in TAG Study

Transaction Audit Group, a third party analytics provider, awarded high marks to one of the world’s largest options brokers, Interactive Brokers, for both price improvement and speed of execution. The independent study looked at market orders below 10,000 shares where IB improved executions in the second half of 2007 by 0.35 cents per share better than the industry average. The broker also executed orders at six times the speed of the industry average at 0.9 seconds compared to the average of 5.6 seconds.

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Go East Futures Traders, Go East!

By the time fund manager-turned-investment-biker Jimmy Rogers sold his New York apartment two years ago and moved to China, a growing number of American retail futures traders have joined his lead and found white hot investment opportunities awaiting them. Kelsey thinks that the launch of index futures on the Shanghai Futures Exchange will increase demand for equity index futures in the region. “While overseas investors will not be able to access this market immediately due to Chinese regulations, they can trade the Hang Seng China Enterprise Index futures (H share futures) listed in Hong Kong,” he says. This index tracks the major Chinese companies that are listed on HKEx.

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Win A Job!

Interactive Brokers, a global leader in electronic market-making and brokerage services, recently announced the winners of its 2008 College Trading Olympiad in which students design programming code and apply it to a mock $1 million trading account. In return the company lures hundreds of resumes from entrants, many of whom are keen to join the programming staff in Greenwich, Connecticut, where the company has its headquarters. Since there is a shortage of top-notch technologists, IBG created the Olympiad to highlight the growing need for engineers and computer science professionals in the financial services industry. The company will pay out close to $400,000 in prize money this year.

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Getting Active on Interactive Brokers

The core market-making business unit of Interactive Brokers is not only one of the largest in the options industry, but also demonstrates its strength by trading in markets that scare other people. A recent challenge to the entire risk-management industry has intimidated investors, who prefer to “shoot first and ask questions later.” Yet IB is a firm that takes pride in its strong risk-management focus and especially the automated systems designed to avoid or control that risk. “Our real-time margin system prevents the execution of orders for customer accounts with insufficient margin by continuously valuing positions and enforcing limits for each account, and it automatically liquidates positions if any account violates its limits at anytime,” explained spokesman, Andrew Wilkinson. One analyst that follows the company, Rich Repetto at Sandler O’Neill noted that Interactive Brokers stands out from the crowd and that the company, “uses complicated computer programs to help price derivatives.”

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Trader Monthly Magazine Ranks Interactive Brokers in Best Prime Broker and Best Equity Execution Awards

Seemingly out of nowhere, Greenwich-based Interactive Brokers unexpectedly emerged as a hot contender to Goldman Sachs in the Trader Monthly magazine Best Prime Broker category. Best known for its superior technology as a leading electronic market-maker in options, one buy-sider hailed the firm’s “deep liquidity and broad coverage.” The quiet rise of IB as a prime broker in this year’s voting sends a strong message to Wall Street: Thomas Peterffy’s gang in Greenwich is eating your lunch.

Interactive Brokers has extended its reach into prime brokerage over the last year according to Steve Sanders, SVP of Marketing and Product Development. He notes that IB’s built a portfolio margin system described as “one of the only real-time options on the Street.”

Interactive Brokers came a very close second to Goldman in the Best Execution (Equities) category in the 2007 awards. One voter noted IB’s “low cost and good fills” as rationale for siding with the broker. Another added: “Broad range of market interfaces seem to get the best possible price, whether buying or selling.” For the first half of 2007, an independent audit taken by TAG Audit found IB was able to achieve 14.85 percent price improvement on customers’ marketable option orders versus an industry average of 0.57 percent according to Sanders.

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Interactive Brokers, one of the largest online options brokerages, added a real-time risk management platform as it boosts its portfolio analysis capabilities. Dubbed the IB Risk Navigator^SM traders can weigh the risk of their derivatives positions in real-time across all asset classes.

According to chairman, Thomas Peterffy, the real-time component is valuable since the trader can view exposure immediately and can adjust the position accordingly. “What-if scenarios let the user hypothetically modify positions to see how changes in the portfolio will affect the risk summary,” he said.

IB is offering the risk function for free, while similar analytics can cost up to $500,000 said Peterffy.

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Having made a foray into the prime brokerage space in April of 2007, Interactive Brokers made a bigger push in November to service the needs of its hedge fund customers when it agreed to acquire one of only a handful of remaining independent direct-market-access providers, FutureTrade for an undisclosed sum.

The agreement helps IB augment its prime brokerage services to hedge funds and other clients. FutureTrade brings a client base of 200 institutions and 40 software developers.

SVP of marketing and product development, Steve Sanders notes, “Given our mission of providing our customers with the best technology at the lowest possible cost we felt the prime broker business was a natural extension of our current business.”

Some of FutureTrade’s client base includes existing prime brokerage companies such as Bear Stearns and Credit Suisse, as well as companies who already deal with those prime brokers. According to FutureTrade’s president and chief executive, Murray Finebaum, the union should provide those customers with more prime broker service options. “Customers can continue to route to their current prime brokers, or they now have an alternative prime broker in IB that will provide a real-time portfolio margin system and low costs,” Sanders said.

IB’s founder and CEO, Thomas Peterffy expects to integrate the FutureTrade platform with the IB platform within several months.

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With just weeks remaining before Barron’s traditional annual review of electronic dealers, updates and improvements are popping up on many brokers’ websites. Among those featuring upgrades is Interactive Brokers, which has made serious strides in upgrading its offering in 2008.

One cool new tool is the IB Risk Navigator^SM, which lets customers dissect their portfolio and determine value at risk, profit-and-loss potential as well as various Greek calculations. Clients can look at those risk measurements by underlying holdings as well as by industry and includes profit-and-loss graph and table showing how changes in the market affect individual positions as well as an entire portfolio. The IB Risk Navigator is both intriguing and free to customers.

IB has also improved the look and feel of its Trader Work Station. The new Order Wizard categorizes order types and explains why a customer would use them. TWS now integrates over 40 such order types to include icebergs, basket trades and market-if-touched. Other new features include a revamp of the account window, which customers can now customize while the Contract and Securities Search feature is available from within the IB website and not just inside the platform. Overall the IB website has become easier to navigate. Such changes are exactly what Barron’s makes its awards for when the online review is published in the spring.

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By STEVEN M. SEARS

THOMAS PETERFFY, FOUNDER AND CHIEF executive of Interactive Brokers Group, is considered by many on Wall Street to be a genius trader. He is also recognized as a key architect of the equity derivatives industry, which is enjoying 30% annual growth rates.

Yet, Peterffy and Interactive Brokers, whose pre-tax profit margin in the recently ended third quarter was almost 70%, are practically unknown to investors.

Herein lies an opportunity for investors interested in an electronic brokerage and derivatives market-making firm that each day hosts more than 90,000 traders who execute more than 700,000 trades on 70 exchanges, in 24 countries, and in 13 currencies.

"As we become better known as the preferred broker for financial professionals, our customer base and trading volume keeps on growing beyond growth in the market," said Peterffy, who has gone from rags to riches since emigrating from Communist-controlled Hungary in 1965.

Peterffy will not offer earnings guidance for his company, but he unabashedly contends Interactive Brokers is taking business from competitors, and that no competitor has taken more accounts from Interactive Brokers than it from them.

Account transfer records prove the point, and over five years Peterffy said his market making business has nearly doubled while the brokerage business has grown seven fold.

Still, the stock price is not reflective of this success, though it has held up well this year. Year-to-date, the stock is flat, compared to a decline of 17% for the Dow Jones Investment Services sector. During the last three months, the stock has gained 5%.

Some of the stock's stability is attributable to growing investor recognition that Interactive Brokers benefits from volatile trading.

The company has two businesses: an online brokerage firm and a market-making firm in options trading.

The online brokerage competes against companies like Charles Schwab, Fidelity Investments, Ameritrade and optionsXpress.

Interactive Brokers is a tough competitor, especially for sought after professional traders who demand sophisticated analytical abilities and in return trade heavily.

The company's other division is the market making firm, Timber Hill. The unit executes orders for its sister division and otherwise makes money maintaining fair and orderly markets in thousands of different options. In the third quarter, the market-making unit generated 74% of total revenue, compared to 18.2% for the brokerage business.

When the markets behave violently, Interactive Brokers makes money because panicked investors generally trade more, and other market makers with less trading capital and less sophisticated pricing models tend to trade less. This means Interactive Brokers' market making unit, Timber Hill, trades with more orders at better prices.

The risk to buying Interactive Brokers is that it is essentially a trading firm, albeit a very good one, and earnings can be volatile. Moreover, Peterffy still owns about 85% of the company and there are always concerns that shareholders would be diluted if such a big shareholder decides to sell more stock.

The company's initial public offering was in May. If the economy enters a recession, the combination of marketing making and online brokerage businesses should give Interactive Brokers an edge against other brokerage and exchange stocks simply because of is business mixture and model.

The true benefit Interactive Broker's offers investors -- and this is more nuanced than fundamental analysis of a stock -- is the business model. The company is built on a technology platform that generates operating leverage, which is rare among online brokerage firms because inevitably staffing at many firms grows to support the system.

Consider this: during the recently-ended third quarter, Interactive Brokers third-quarter revenues rose 35% over the second quarter, yet expenses only increased 5.4%.

That's operating leverage in action, and it's a magic elixir to corporations and for investors. If properly constituted, as at Interactive Brokers, operating leverage maximizes the benefits of increased revenues without significantly increasing expenses.

High degrees of operating leverage are possible at Interactive Brokers because the business relies on a very sophisticated, large computer system that is operated by a small group of people.

Consider that the firm's third quarter incremental margin was 94% on a quarter-over-quarter basis and 83% year-over-year as high trading volumes "literally fell to the bottom line," said Rich Repetto, a Sandler O'Neil analyst.

Sandler's Repetto recently raised Interactive Brokers' 2007 and 2008 earnings estimates for the company to $1.58 and $1.63, up from $1.32 and $1.58, respectively. He also raised the price target by 21% to $34 from $28. In the recently ended third quarter, Interactive Brokers' net revenues totaled $445.1 million and income before income taxes was $307.9 million for the quarter, compared to net revenues of $339.8 million and income before income taxes of $220.1 million in the same year-ago period.

"We believe a higher multiple is justified based on the significant operating leverage demonstrated in 3Q07," Repetto said.

With Interactive Brokers, investors have a highly-profitable business model with international reach. When the cloud lifts on the financial sector, the company should shine.

Having timed its entry to the prime brokerage business to coincide with the SEC’s official launch of portfolio margining accounts in April, Greenwich-based electronic broker announced the acquisition of FutureTrade Technologies along with FutureTrade Securities. Its client base of around 200 institutions includes hedge funds with an average account size of $200 million in assets under management.

Thomas Peterffy, chairman and CEO at Interactive Brokers hopes to integrate both trading platforms within four-to-six months. “We expect to be able to provide Interactive Brokers’ routing and execution technology to FutureTrade customers, including our options executions,” said Peterffy.

FutureTrade’s existing clients will soon be able to trade a far broader range of assets and markets than at present thanks to IB’s provision of direct electronic access to non-U.S. options markets, futures, forex and fixed income on more than 70 exchanges and trading venues around the world from a single account.

Only 12 self-clearing broker-dealers were initially approved to open portfolio margining accounts in April. Interactive Brokers was one and of the 2,000 accounts opened through September 2007, IB had opened 1,300.

FutureTrade does not provide prime brokerage services to its clients, some of which manage billions of dollars of assets according to Murray Finebaum, president and CEO at the company. The acquisition aims to provide clients integrated execution and clearing services attractive enough to switch over to IB for prime brokerage.

“We do a number of things that are uniquely suited to hedge funds’ workflow in terms of capturing trades, downloading them to prime brokers, and marking positions to market in real time,” said Finebaum. “Interactive Brokers also does a number of those things, but we do it specifically for hedge funds.” Finebaum will help integrate the firms’ trading platforms and build the prime brokerage business.

“The FutureTrade platform complements IB’s facilities and accordingly, when the two platforms are fully integrated, all facilities of both platforms will be available to all customers,” Peterffy said.

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Thirty years after he bought a set on the American Stock Exchange, Thomas Peterffy sold 40 million shares through an IPO in the 500-person firm he created. In that period the company has grown in stature and now executes 14 percent of the world’s equity option volume and 19 percent of U.S. option execution.

The Timber Hill market-making arm was a pioneer in providing global market access, while Interactive’s brokerage arm, now fourteen years old, leveraged that infrastructure to both retail and institutions alike. Today the company offers clients direct market access and advanced trading tools to trade in more than 70 markets where they can trade options, equities, futures, forex, commodities and bonds – all from a single universal account.

Interactive Broker’s in-house platform supports the execution and clearing of both market-maker and brokerage customer trades. The company has steadily advanced to allow different asset class trading for its growing customer base.

The increase in the popularity of online trading around the globe and the increase in the desire to trade ever-more fashionable instruments has tailored the companies ambitions delivering superior technology and low trading costs to users wishing to trade crude oil futures to stocks and futures in the Pacific Rim.

In this question-and-answer session John Hintze asks senior vice president of marketing at Interactive Brokers, Steven J. Sanders a wide-ranging variety of strategic questions to find out where customer trading and volume growth is taking place at the company. As Mr. Sanders explains, growth is occurring everywhere with a specific thrust in overseas business, futures markets and especially vigorous growth in customer interest in currency trading.

Over the years the company has listened to the needs of its customer base and has furnished its superior trading technology with tools to make trading more efficient. Those range from the option trader, basket trader and spread trader, which allow customers to execute and view customized combination orders using the Smart Routing technology to find the most advantageous bid and ask for the customers’ orders.

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Interactive Brokers, the electronic brokerage company that built up a near 15 percent slice of options market-making around the globe each day, recently launched a further initiative to pass along exchange rebates to customers. Managing Director Steve Sanders notes that, "the options exchanges are experimenting with different pricing structures, and we want to pass through the costs, as well as the rebates, that are now being passed back to brokers."

The move allows its clients to trade equity options at commissions between $0.15 and $0.70 cents plus exchange fees. In addition, Interactive Brokers promises to pass on to customers rebates and cost reductions where they exist as a result of qualifying trades.

Thanks to initiatives by several options exchange regarding the “make or take” model, the benefits from changes to this pricing structure will be handed down to Interactive Broker’s clients through unbundling of individual option prices. By employing quoting strategies that improves exchange liquidity, traders can benefit from receiving rebates from the exchange.

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One January morning in 2007, electrical engineering student, Brian Eckerly booted up his laptop before heading out of his apartment for college. For the next eight weeks it remained undisturbed as it received streaming quote data to a brokerage account containing $100,000. From time-to-time during that time, the computer would automatically transact trades in the account that Eckerly had himself programmed. By the end of the period that account was worth $394,190.

Although the account contained only phantom money, Eckerly was taking part in Interactive Brokers second annual college trading Olympiad and walked away with a first-prize $100,000, the fruits of his programming success.

For Interactive Brokers, the motivation is not financial. Rather the tech-savvy market-making and brokerage firm based in Greenwich, CT, is constantly hunting fresh talent from within the technology arena.

“The old trading world required big, aggressive, street-smart folks – now it’s technology skills that count,” explained Steven J. Sanders, senior vice president at Interactive Brokers. “We just don’t ever get good technologists.”

The $100,000 play-money is the end game for tech-students once they have built their own trading strategy, coded the software and implemented it to their trading account at the brokerage firm. Each student can trade whatever asset class they choose within this account, ranging from equities, options, currencies bonds and futures.

Second place winner in 2007, Konstantinos Tsahas, a master’s degree candidate in Baruch’s program said the competition was like “an eight-week internship from your home.” For him that internship paid a handsome $6,250 per week.

Thomas Peterffy, CEO and founder at Interactive Brokers is the industry’s leading proponent of electronic trading and has spent 30 years building his company. Today the company employs an army of software engineers and system administrators, whose aim is to continually improve the firm’s vast trading technology.

With $400,000 at stake in prize money, it’s far from an inexpensive way to lure talent, but according to Sanders, “the contest works as a filter that gives us much more than a resume to look at.” The 2006 contest resulted in two programming hires.

Sanders expects a bigger turnout each year after the 2007 contest attracted some 204 contestants who used C, C++, Java, Visual Basic and Excel scripts to submit their trading software. By communicating via an application program interface with Interactive Broker’s Trader Workstation software, the trading program was able to retrieve market data and execute trades in the same way that professional traders use the platform to trade complex algorithms.

Brain Eckerly took his $100,000 prize money to his new job in Dallas, TX and intends to invest it, noting that this time around, real-money might require a more serious approach to his investment decisions.

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During the last decade or so changes to the regulatory environment have forced multiple-exchange listing of options and created a much more liquid arena for institutional investors to hedge portfolios. Some ten years ago around 80 percent of options trading stemmed from retail clients, while a recent industry study indicates more than half of all options trading comes from institutions and notably hedge funds. Add in the advent of rapid-fire electronic trading and investors’ ability to execute more complex options strategies without pushing market prices away from them and you have an ideal situation for explosive volume growth in what has become a key investing class.

Options positions allow investors to manage the risk of owning stocks. Put options allow investors to equally offset such positions in the event portfolio managers need to hedge against a perceived adverse outcome. The number one use of options during this growth explosion has been for precisely this reason. Hedge funds are especially key users of the options market since they tend to trade both long and short positions simultaneously.

Senior market analyst at Interactive Brokers Group, Andrew Wilkinson, notes the explosion in the popularity of index exchange traded funds. The options volume on these funds is enormous each day and clearly it’s skewed towards the put side. “Spreads are narrow, trading costs are down and trading volumes are through the roof. There is a tremendous amount of liquidity in options. These options are efficient hedging tools for long-only money managers to protect their portfolios from downside risk.”

While other well known trades have boosted traded options volume, such as dividend capture and put-interest plays, one industry report from financial services consultant, the Aite Group, shows that volatility strategies are increasingly popular with hedge funds and other investors. Such trades tend to care less about the direction of the market in general and tend to play on a break from the prevailing range – either up or down. Traders can capitalize by banking on movements in options market volatility by positioning accordingly to take advantage. Investors have set aside increasing amounts of capital to play market volatility over the past three years as more traders aim to capitalize on the troughs and peaks of volatile trading.

The introduction of portfolio margining for customers may also allow them to put more capital to work than under older margining rules. By careful use of hedging techniques, investors can offset some portfolio risk and use less capital at the same time under certain circumstances. This has encouraged investors to trade more with less of their wealth at risk.

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Having built a hugely successful brokerage company based upon easy automated access to trading venues, Interactive Brokers chairman Thomas Peterffy was adamant he wouldn’t sell shares to investors in the traditional Wall Street manner when he recently launched an IPO in stock at the company. Instead he chose to use the Dutch auction process to allocate shares efficiently allowing investors large and small to get in on the act.

The Dutch auction process was popularized by Google founders when they floated part of the company. Dutch auctions aren’t so popular on Wall Street where powerful investment houses get to allocate shares at a price they set. During that process they have to satisfy the often conflicting interests of the company coming to the market, investors, clients and themselves. Meanwhile the Dutch auction process ensures that supply and demand is in balance from the outset. The initial rise in shares at Interactive Brokers could be said to confirm that the process it used to establish its share price is more efficient than that of the traditional Wall Street method.

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Options-trading specialist firm Interactive Brokers Group Inc. gained the spotlight recently as it raised $1.2 billion in its stock market debut – marking the richest IPO to-date for 2007, as movie theater chain AMC dropped its own IPO in the face of weak pricing pressures. Following a successful online auction for its shares, handled by W.R. Hambrecht, Interactive Brokers sold 40 million shares at $30.01. On its trading debut just over half of the shares traded in the open market with shares at one point rising 10 percent above the auction price. Interest in companies that provide market access has surged recently as cross-border consolidation sweeps the industry as technology replaces the outdated open-outcry system of trading.

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It may have taken 30 years for the world’s investment community to hear the message that Interactive Brokers founder and Chief Executive has been sending, but they heard it loud and clear when the company sold 10 percent of its shares in the largest IPO year-to-date.

The IPO saw heavy demand when trading began as investors bid for almost four times as many shares than were available as the Greenwich, CT. brokerage company raised $1.2 billion. Interactive Brokers handles 20 percent of the trading volume in North America and offers customers the facility to trade equities, commodity, bonds and currencies all in the same account. The stock debuted with an initial 10 percent jump before settling with a near-5 percent gain at the end of its first day trading.

Both options and electronic trading are hot topics these days. Options trading volumes are increasing rapidly with exchange volume at or near record levels. Germany’s Deutsche Boerse bid $2.8 billion for the International Securities Exchange recently while the NYSE Group and the Nasdaq exchanges also began options trading operations.

In an interview with reporters immediately after Mr. Peterffy rang the Nasdaq opening bell at the company offices, he note the intense opposition there had been across the industry to adopt electronic trading. He compared the situation to that in pre-industrial England when laborers opposed the introduction of the loom, which became a key technological development in history.

Shares in the company were offered via a Dutch auction process rather than the usual investment bank led sale. Mr. Peterffy noted that 80 percent of the successful bidders at the IPO were institutional buyers. He noted that the auction "gives everybody an equal chance to participate."

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E-Brokers: Separating The Wheat From The Chaff

(Matthew Rand with AAII)

Despite what seemed like a wave of commission cuts, a study by the American Association of Individual Investors (AAII) found that in the past year, average discount brokerage commissions as a percentage of trade-size held steady. A $5,000 broker-assisted trade costs $33.50 on average, and a $25,000 trade costs $52.50 on average. For a $25,000 online trade without broker assistance, the average commission is $19.50, according to AAII. The study looked at 56 discount brokers.

AAII surveyed its members and found that the most popular 10 brokerages were used by nearly 90% of respondents. The top two brokerages in that survey were Interactive Brokers and USAA Brokerage Services . Interactive was No. 1 for price of a trade, execution speed and the reliability of electronic trades. Commissions at Interactive Brokers run a half a penny per share, or 50 cents for a 100 share trade, and account minimums are $5,000. USAA was No. 1 for overall satisfaction and No. 2 in price of a trade, execution speed and reliability of electronic trades.

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Programmers rewrite traders' winning formulas

(John Dizard)

The continuing democratisation of the market-making function is one of the most powerful, and intriguing, forces in finance. The knowledge of how securities are priced had been the province of tight-knit bands in the City of London, Lower Manhattan and a handful of satellite centres, who collected monopoly profits from getting ahead of the customers.

The gradual disintegration of those mobs is one consequence of the rise of electronic trading. I think this will accelerate rapidly in the next bear market in risk, over which liquidity will increasingly be provided by a horde of small market makers, each with the computation and communications power of a mid-size brokerage in the last decade.

While the pieces are largely in place for this in the equity markets, the next fat-margined oligopoly to fall will be that of the credit traders. For now, they're concentrated in the big banks, insulated from competition by the moat of counterparty risk. When credit trading is based on central clearing houses rather than dealer-customer trading lines, and every customer has to put up the same risk-adjusted collateral, then that business will also have to be shared with the small professional trader.

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Which is why the results from a recent trading competition run by Interactive Brokers, LLC are so interesting. For eight weeks, from January 15 to March 9, the electronic brokerage ran a simulated trading competition, called the Collegiate Trading Olympiad, open to university students, starting with a notional $100,000 (€75,000, £51,000) in capital for each competitor.

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Interactive Brokers Runs Annual Olympiad Trading Program to Recruit Technologists for Electronic Trading

Interactive Brokers Conducted its second annual Olympiad Trading Program to find technology savvy college students who can create a computerized trading program.
(Ivy Schmerken)

Interactive Brokers (IB) held its second annual IB Olympiad Trading Program to attract qualified college graduates to the trading profession. This year's contest, which began Jan. 15 and ended March 9, attracted 260 participants, up from 125 in 2006, according to the global broker and market-maker, which publicized the contest through college admissions offices as well as with e-mails to candidates and signage displayed at college placement offices.

IB runs the contest as a way to recruit technology-savvy computer science and engineering students into its business. Each contestant starts with $100,000 in phantom money and develops a workstation application program interface. Students must create a computerized trading program that generates at least 25 trades. They can trade stocks, bonds, options, futures and foreign exchange -- all the products in IB's universe, according to Steve Sanders, managing director at Interactive Brokers.

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In the 12th annual Barron’s Magazine online broker survey Interactive Brokers held its own earning the highest number of stars awarded to any of the participants.

The company performed best in two categories. Interactive Brokers scored highest in the cost category earning 4.8 out of a maximum score of 5.0 thanks to its low-cost commissions. The company also ranked as the best trading venue for investors who want to trade internationally.

“Today, it’s possible to buy Swiss stocks or sell Japanese shares from your desktop; you can also go long oil, short a silver contract, trade a butterfly on the S&P 500 or employ computer-generated algorithms to jump from stock-to-stock,” says Barron’s.

Interactive Brokers swept aside other brokers with its international offerings, its array of futures products and low fees. Over the past 12 months the company has added access to Swedish, Japanese and Hong Kong stocks. It added floor-traded CME and CBOT futures, NYMEX physical energy futures and soft commodity futures along with CBOT electronic agricultural futures.

The company has industry renowned proprietary technology that allows clients to trade options in penny increments. Recently a pilot scheme was launched to test the performance of 13 stocks whose options could be traded in pennies rather than nickels and dimes. Interactive Brokers allows its own customers to trade all equity offerings using penny pricing.

Fees at Interactive Brokers are low as are fees charged on margined instruments. Barron’s calls these fees “the lowest among the brokers surveyed this year.” In addition the rates paid on cash are among the highest, which makes the software an obvious choice for the cost-conscious. It also has a new Web-based platform.

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Techniques accessible to hedge funds are becoming readily available, creating an unprecedented democratisation of investment management.

For all the articles, speeches, television stories and cocktail party chatter about the threats to and from the hedge fund world, the business is still taking in a lot of money, more than Dollars 126bn (Euros 97m, Pounds 64bn) in the US last year, according to Hedge Fund Research of Chicago.

What is less talked about is a set of developments in technology and regulations that is taking away the competitive edges the funds have. The techniques available to the hedge funds are becoming available to the investing public, or at least its more technically skilled members. This is part of a democratisation of financial management that will, sooner rather than later, cost the hedge fund community its claim on the 2 per cent fees and 20 per cent profit shares that it believes are its right.

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Steve Sanders of Interactive Brokers LLC, says the proposed changes in portfolio margining rules are even more important to the democratisation of investment management. "If you were a hedge fund you could go to your prime broker and use techniques such as offshore accounts, or 'joint back offices' to get the benefit of 15-20 per cent margins," a big advantage over the 50 per cent rule that has applied to individuals.

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Foreign Stock Trading

While several brokerage companies permit clients to trade foreign stocks and currencies, doing so can often involve going through a third-party broker, which can add extra fees and slow down the transaction.

Interactive Brokers – a brokerage aimed at active and professional traders – already offers direct foreign trading in 18 markets and plans to add trading in Italian and Brazilian markets soon.   

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Interactive Brokers FX Trader wins 2009 FOREXDS Highest Broker Satisfaction Trader’s Choice award for the Americas

Market research and retail forex information portal, Forex Datasource named Interactive Brokers as Highest ranked for Broker Satisfaction for the Americas region in its inaugural FOREXDS Trader’s Choice Awards. Forex Datasource collected data from forex traders covering broker preferences over a one-year period and focused on categories such as satisfaction with trading platform and broker service. Interactive Brokers FX Trader platform was recognized as one of 12 forex brokers having achieved a top three ranking in at least one continent and Interactive Brokers collects the Highest Broker Satisfaction award in the Regional Broker category.

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Interactive Brokers Sees More Registered Reps Becoming Independent Advisors

Electronic market-maker and broker, Interactive Brokers has witnessed an acceleration of the trend for Registered Representatives to become Investment Advisors. Registered Representatives with strong customer relationships are being put in a difficult position as many large brokers decide against maintaining smaller balance client accounts. Many of those representatives are taking the plunge and making the decision to go independent according to Interactive Brokers.

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Brokerages, Exchanges Tap Automated Stock Lending

In true Interactive Brokers fashion, the company is helping to lead the way in diversifying into automated securities lending in order to bring increased efficiency and transparency to the stock loan market while significantly reducing risk. IB is one of the first in the industry to embrace a system to be offered by Automated Equity Finance Markets, the broker-dealer subsidiary of Quadriserv. The stock loan market has typically been plagued by a lack of transparency in transactions – a dangerous game to play following the collapse of Lehman Brothers and Bear Stearns – when the counterparty is occluded. However, Interactive Brokers’ SVP of marketing and product development, Steven Sanders opined that “the trick, of course, will be to get borrowing brokers to go along [because] the opaque nature of lending is more profitable than transparency.” Borrowing brokers will hopefully join the ranks of the AQS system given the outstanding creditworthiness of IB, which welcomes the transparency provided by the AQS electronic auction market for transactions and negotiated trading for stock loans.

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International Securities Exchange Leads Investment Round in Quadriserv Inc.

Interactive Brokers Group joined the world’s largest equity options exchange, the International Securities Exchange and several other leading institutional investors in a substantial investment to support the AQS securities lending platform. AQS is operated by Automated Equity Finance Markets Inc., a wholly owned subsidiary of Quadriserv. “This investment, led by securities exchange innovators and market leaders, demonstrates critical and widespread industry support for Quadriserv’s mission of bringing transparency and efficiency to the securities lending market,” said Quadriserv’s CEO, Thomas Perna. AQS matches borrowers and lenders in an exchange-like platform using automated liquidity and price discovery mechanisms. Trade anonymity is ensured by the provision of central counterparty guarantees from the Options Clearing Corporation, which processes the trades.

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Hung up in Red Tape

Some traders keen to exploit index and arbitrage strategies involving the Korean Exchange’s deeply liquid and actively traded KOSPI future have been hung up on finding access to many markets even after its recent CFTC approval. Many brokers have found it hard to access, needing a Korean broker to clear trades with investors needing to switch between dollars and Korean won another hurdle. Today the U.S. equity markets represent less than one-third of global market capitalization compared to around one half just a decade ago, which means that investment opportunities have ripened around the world. Some brokers find ways to provide access to foreign capital markets for their clients. As one example, Interactive Brokers bills itself as the “professional’s gateway to the world markets.” Founded by Wall Street icon Thomas Peterffy in 1977, the company has made electronic connectivity to world markets coupled with advanced options trading technology a cornerstone of its business. Interactive Brokers offers its customers a Universal Account in one of 16 currencies of their choosing, from which they can operate across global markets in more than 80 market centers.

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Discount U.S. Trading Firm Interactive Brokers Entering Japan

Japan is the latest venue where U.S. based investment services company, Interactive Brokers has announced it will provide customers with real-time electronic access to invest in stocks, bonds, future, options and other financial vehicles. The company already provides electronic access to over 70 global financial markets. Its competitive edge lies in its low fees of 0.005 dollar or less per share for U.S. stocks and other instruments, some not made available by Japanese brokers. Its deep discount approach may prompt domestic brokers to offer reduced commissions. The firm hopes to expand its offering of listed options on the Tokyo Stock Exchange and Osaka Securities Exchange.

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Opening doors to Asia markets

Interactive Brokers recently acquired Japanese Securities Company, Moriai Securities as it continues to push hard as it enters more Asian markets. Japanese financial institutions will be able to access IB’s dealing technology in early 2009 followed by retail clients at a later time. The company also received the green light to let its customers trade KOSPI 200 index futures recently when the US CFTC approved the product for trading by US investors. The KOSPI is one of Asia’s most liquid markets where an average of 24.5 million contracts traded in the first half of 2008. IB is the only broker we could find in our database that provides customers access to this particular contract.

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Gaming Recruitment

US broker-dealer Interactive Brokers has adopted a novel way of raising interest in financial technology as it looks for fresh programming talent in its fourth annual College Trading Olympiad. Dealing With Technology sat down to discuss its preparations for the 2009 contest to learn how IB requires students to write trading algorithms that could put them on the company’s radar when they graduate in 2009. IB is hoping it will boost applications to more than the 327 entrants in 2008’s competition.

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Interactive Brokers pushes into Asia with direct Kospi link

Continuing its push into Asia, Interactive Brokers now enables its US customers direct connectivity to the Korea Exchange’s highly liquid Kospi 200 index futures contract. "We’re looking to expand," said Steve Kelsey, managing director of Interactive Brokers in Hong Kong. "A lot of our competitors have some tick on their balance sheets. We're using this as an opportunity." According to Futures & Intelligence’s data the Kospi 200 index futures traded an average of 4.19m contracts this year, while options on the Kospi averaged 226.8m contracts so far in 2008, making the Kospi’s derivatives the world’s most actively traded. The move is another building block as its advance into Asian markets where the company renamed the Japanese securities company, Moriai Securities it recently purchased affording it a foothold in the country as the renamed interactive Brokers Japan. IB also began trading in Taiwanese instruments this year and seeks to open a Chinese office.

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Making a Case for Other Bailout Plans by Peter Applebome

Now that Treasury secretary, Henry Paulson has changed plans on exactly how to spend the proceeds of the $700 billion rescue plan, he’s concluded that buying troubled mortgage assets won’t quite do the trick. His search for an alternative probably won’t lead him to Thomas Peterffy, who went from poor Hungarian migrant to online brokerage billionaire at Greenwich-based, Interactive Brokers. Mr. Peterffy provides perhaps the simplest solution when he proposes that the treasury pays mortgage holders $250 per month for five years to help pay meet their monthly payment. As he sees it, the value of mortgage-backed securities would rise thanks to borrowers’ sudden ability to pay. Housing and therefore banks would stabilize, while homeowners would have the incentive and means to keep paying their mortgages. The plan would be less costly than the bailout package but would put family and homeowners first, rescuing banks along the way.

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Exchange Trade Currency Products - Offering retail investors access to new investment strategies

Exchanges have been long designing currency contracts to attract the self-directed investor and the recent turn in the dollar adds weight to the argument that investors will add currencies as an asset to their portfolios. Interactive Brokers has offered its clients the ability to trade multiple asset classes via its Single Universal Account since 2002 enabling clients to invest directly overseas as well as base their account in any of 10 available currencies. An increasing number of its customers now use its proprietary forex platform. IB is well known for providing rapid access for its customers as it delivers direct market access (DMA) to electronic global exchanges and has built a toolbox to include over 40 order types.

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Technology – the Online Finance 40

Ranked number 25 in 2008, Interactive Brokers Chairman and CEO, Thomas Peterffy has risen five places since last year’s Top Technologists ranking. As a trained computer programmer, Mr. Peterffy saw it as inevitable even as an options market maker at the American Exchange in 1977 that securities the market would become all-electronic. “We’re still only half way there. Half the people are still trading by telephone,” said Mr. Peterffy. Half of the Greenwich, CT. company’s 700-plus employees work on technology that gives investors low-cost access to 83 exchanges in securities, foreign exchange and commodities markets in multiple languages and currencies through a single account. Mr. Peterffy said his engineers are now rolling out an institutional order management system for automated staging and execution of all products and order types for traders no matter where they are located.

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Are Third-Party Smart Order Routers the Best Option for Options Investors?

Seven U.S. options exchanges have created fragmented liquidity and forced online brokers to leverage smart order routing to execute their retail customer orders at the best price and still meet best execution requirements. Smart order routers routinely route orders to the exchange displaying the best price but some third parties are able to favor flow of orders to their own market maker so long as it is displaying a price at least as good as the national best bid or offer (NBBO). Not all smart routers were designed equal according to Steve Sanders, SVP of marketing and product development at Greenwich-based Interactive Brokers. “We've been in this business for 30 years, so everything we know about this options business we built into our smart router. It’s nice to hear that other firms are introducing smart order routers, but what are their price improvement statistics and how do they stack up against the industry?” According to earlier TAG statistics, an independent audit firm hired by IB in 2007 to measure the performance of its options executions, IB price-improved option orders by 114 cents compared to an average industry price-improvement of just 57 cents during the second-half of 2007.

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Crossing Borders

Some critics argue that providing intricate connectivity to global trading venues doesn’t benefit the US investor who could end up paying a fat commission when making the necessary foreign exchange transaction to pay for a German stock trading in euros. Interactive Brokers looks at three things when deciding where to set up self-clearing operations worldwide. Already linked to more than 70 market centers worldwide, exchanges must offer electronic trading, must provide liquid trading conditions and there must be a level playing field for participants. Interactive Brokers’ customers use a Universal Account when doing foreign currency transactions and they see a tight bid/offer spread prior to doing the deal.

As Interactive Brokers is preparing to become a broker in India and its IT staff is well versed in establishing connectivity to exchanges and local clearing houses as well as dealing with cultural nuances. The company can connect to global exchanges within months. But the company will only partner with local brokers to test the water in new markets. “We always want to deliver every trade at the cheapest possible cost. The only way to do that over the long run is to be self-clearing, whether it’s in the US or any other country,” says Steve Sanders, senior vice president, marketing and product development at Interactive Brokers.

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Online Offerings to Cure the Summertime Blues

Price improvement on certain market orders from customers at Interactive Brokers is just half of the story. Research outfit Transaction Auditing Group (TAG) recently showed IB’s U.S. stock executions for the second half of 2007 were 0.35 cents per 100 shares better than the industry average throughout the period. In addition the online broker executed orders in an average of 0.9 seconds compared to an industry average of 5.6 seconds. However, the report sheds light on the existing practices used within the industry, where the SEC allows firms to count improvement to orders by as little as a hundredth of the penny. IB uses the NBBO (national best bid and offer prices available at the time of execution) as its benchmark for price improvement. Steve Sanders, SVP at Interactive Brokers notes that as a whole the industry “disimproves” on the NBBO. Unlike many firms who internalize orders and improve by a mere fraction in order to report a high percentage of price improved transactions, IB reports the net price improvement and price disimprovement according to Sanders. IB posted the formula it uses on its website at http://individuals.interactivebrokers.com/en/p.php?f=smartRouting&ib_entity=llc.

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Behaviors to Improve Your Trading

The building blocks to becoming a successful trader are to be found in education and learning. Such building blocks include technical and fundamental analysis. Interactive Brokers offers free online webinars, charting software and real-time simulators so that investors can become comfortable enough to succeed. Risk management in the market place begins at home for online traders and for many that means understanding the trading technology at their fingertips as well as the many different order types available. IB offers over 40 different order types and presents risk tools that allow online traders to easily manage market risk.

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With Online Trading, it Pays to Shop Around

It’s nice to know that as you gas up your car or buy your groceries there are still bargains to be had. Trading stocks over the Internet is just one example. An obvious benefit of low commissions is that it can help boost your returns. Another consideration is that it helps you focus strictly on the merits of each investment. Low commissions at well-established U.S. firm, Interactive Brokers, appeal largely to professional and active investors. The firm offers a detuned version of its trading platform, called WebTrader, which should be manageable for investors comfortable with online investing. There is a $10,000 minimum account opening balance required and extremely low commissions of just 1 cent per share to buy Canadian stocks, while that on U.S. stocks is just a half penny.

Trading International Stocks and ADRs

Trading outside of the United States offers savvy investors diversification and cracks open opportunities in emerging markets, not to mention the benefit from favorable exchange rates. For decades, such diversification was only available to large institutions and expensive full-service brokerage houses but thanks to technological advances individual investors can practically trade around the clock and across the globe. While each brokerage company differs in terms of the access it offers, Interactive Brokers is preferred by many if rock-bottom commissions and the ability to access the widest number of exchanges and markets is the goal of the investor.

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Hedge Fund Technology

It used to be the case that hedge funds would turn to their prime brokers for add-on services such as capital introduction. Today the needs of hedge funds have become more critical as they seek to understand the precise impact of a single asset movement and how it impacts an entire portfolio when markets unexpectedly move, more so these days when funds employ multiple asset classes. Interactive Brokers, a global leader in electronic market-making and brokerage services, launched the IB Risk Navigator earlier in 2008, prompted by demands from institutional customers. The company translated the same risk management tools used by its market-making Timber Hill affiliate. IB provides customers with value-at-risk (VAR) tools to monitor actual and forecast hypothetical portfolio impact on exchange traded products. “If it’s possible to create the same type of position using exchange-traded products, you’re much better off,” said Steve Sanders SVP marketing and product development at the brokerage company.

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Forbes Global 2000

Interactive Brokers joined the Forbes Global 2000 companies in 2007 with a ranking of 1624. The global high performers list ranks companies with a share price greater than $5.00 traded on American exchanges with positive equity and sales in excess of $1 billion. Each company achieved a high composite score on its ranking for sales, profits, assets and market value. Together the global 2000 account for $30 trillion in annual revenues and $2.4 trillion in profits. Between them the global giants employ some 72 million workers and have a composite market value of $39 trillion.

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IB Trading Olympiad Winners Announced

Interactive Brokers announced the winners of its third annual Collegiate Reading Olympiad and is handing out almost $400,000 in prize money to winning students who made paper profits trading in the eight-week long contest. “The need for financial programmers has been something that we as a company have tried to raise awareness of over the past several years,” noted senior market analyst, Andrew Wilkinson at the company. This year’s competition drew 372 applications from 32 countries who developed a trading plan and algorithm to initiate at least 25 program trades using Java, C++ and Visual Basic. Two of the 2006 winners joined the company as a result of their Olympiad success.

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Global ETF Awards

Timber Hill the market-making unit global direct market access provider, Interactive Brokers, was awarded runner-up in the Exchangetradedfunds.com 2008 awards in its Best Market Maker category for both Europe and Asia. Timber Hill (Europe) AG and Timber Hill Securities Hong Kong Ltd. are pleased to receive recognition as part of these awards. The awards recognize those institutions that have contributed and expanded the exchange traded funds industry worldwide. Interactive Brokers provides direct electronic market access to almost 80 markets worldwide.

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The Power of Speech

Market traders have been saying for years that surely it is only a matter of time before all trading is done electronically. That transition has been harder than we might have thought it could have been despite technological advances. Brokers find they must operate in a hybrid environment in which electronic communication coexists with voice communication at different points of the trade cycle. Almost all the business transacted through Interactive Brokers is electronic, but the company is now starting a voice brokerage business. “We would never want the voice brokers to in any way cannibalize electronic business, but it rounds out the offering.”

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Making Crosses Work

The efficiencies of the Penny Option Pilot program continue to stir fierce debate among option traders. Some industry executives claim that the move has created a lack of liquidity and thus forced large trades off the floor and over the counter. Given the recent turmoil in financial markets, which wreaked havoc in several major OTC markets, such a claim seems surprising. Along with the advent of electronic trading, penny pricing has had a profound effect on the on the options industry. Narrower spreads have impacted volume positively, but are also responsible for the demise of some firms reliant on wider spreads. There is no reason to delay the rollout of penny pricing especially because it impinges on in-house profitability of orders that otherwise could be internalized.

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Retail investors have not been slow to embrace the fast-growing forex market as an alternative asset class. Choosing the asset class has proven to be a no-brainer for many active traders, but the decision to choose a broker is not so easy. In many cases the customer/broker relationship is strained by the fact that some forex broker models result in the customer trading against the broker as counterparty. A more customer friendly and efficient model offers clients direct access to multiple interbank dealers. Naturally, using this model can allow narrower and more competitive spreads.

The AITE Group of Boston, MA., estimates that daily retail volume in 2008 will reach $100 billion, up from daily volume of $60 billion as at the end of 2006. Although an asset class in its own right, investors’ needs for integrated access to e-forex traded products such as currency futures and options are also clearly growing. Many individuals find need for currency products these days given the fact there has been growing demand for international equities priced in an array of local currencies. An ability to hedge against local currency risk while exposed to other asset classes is behind the rise in customer demand for all-round access to forex derivatives.

Factors that have helped drive investors to the online currency market include government regulation aimed at making markets more transparent as well as huge advances in technology, which permit the ability to send vast amounts of data over the Internet.

Growth in currency trading stems from both institutional and retail trader. Both need best execution technology and risk management tools. According to Andrew Wilkinson at Interactive Brokers Group there has been a distinct rise in market volatility, which makes for excellent conditions for traders. Many investors have woken up to the fact that the U.S. dollar has lost a great deal of value. As such those customers have gone in search of ways to protect the value of their portfolios, including a desire to invest in equities priced in non-dollar denominated units. Invariably that requires an ability to convert currencies across the globe in an instant.

Customers making the decision on where to open accounts tend to appreciate both education and honesty from their broker. Wilkinson adds, “Our best customer is a long-term customer and that relationship can only be built through trust.”

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Now that the options industry has had time to assess the impact of the second round of additional options classes spanning the five months through September 22, the Securities and Exchanges Commission is now analyzing U.S. option exchanges reviews of the pilot test of penny price increments.

Opinions are divided over the long-term affects of penny pricing on investors, particularly institutions with large-sized orders to execute. The four exchanges benefiting most from the current market structure voiced concern and recommendation, while NYSE Arca who made pricing and order-execution priorities to meet anticipated market changes, defended its findings and so implicitly, penny pricing.

Some industry caution is likely due to the success of the ISE, the all-electronic exchange. By making quotes firm to both broker-dealers and customers alike, the ISE was successful in capturing market share after launching in 2000. Arguably it has the most to lose by a change to the status quo.

NYSE Arca has been successful in increasing market share thanks to its adoption of penny pricing. Its market share has risen by 65% to 16.5% of traded equity options through November 2007 compared to 10.6% for 2006. While NYSE Arca prioritizes customer order by price and time, other exchanges rely on size of order quote from competing customers. The penny-quoting “maker-taker” fee models charge investors for taking liquidity and credit them for posting it and better prices. The equity market moved to a similar model post decimalization in 2000.

ISE’s model has been widely credited with the huge growth in option trading volume since 2003. Deep liquidity has attracted large institutional block-orders. Neither retail nor institutional investors nor their broker-dealers pay fees. But the liquidity providers, the market-makers do pay a per-order exchange charge as well as an exchange fee to pay brokers for order flow.

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Executives at the nation’s options exchanges expect that their methods and ambition to improve the visibility of its options execution will soon be followed by broker-dealers. The exchanges are working with the Securities Industry and Financial Markets Association to produce standard reports detailing the quality of execution. But the efforts might not provide fruit fast enough for the Securities and Exchange Commission.

Currently, the various exchange reports don’t stack up for useful comparative purposes according to executive complaints. If some standard report could be agreed upon it might flow down to the broker-dealer industry.

But already one broker-dealer has made moves to provide periodic reports. Interactive Brokers commissioned industry number-cruncher firm Transaction Auditing Data (TAG) to measure its execution performance. The auditor compared Interactive Brokers’ trading data and reported on execution-quality. The report showed that IB received price improvements 14.85% of the time on its customers’ marketable US options orders in comparison to an industry average of 0.57%. TAG has also measured the performance of the Boston Options Exchange.

Unlike the cash equities industry the SEC has not required the options industry to produce regular execution-quality reports. That might change in the months ahead according to industry sources.

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According to survey data from The Financial Industry Regulatory Authority (FINRA) some 1,999 portfolio margin securities accounts had been opened within four months of their introduction by September 30, 2007.

The demand for such accounts is clearly evident and the likelihood that customers will eventually be able to include futures contracts ensures that growth will only head in one direction over coming years.

Earlier data from Connecticut-based Interactive Brokers reported 1,078 accounts containing assets totaling $862 million as of July 31. That means that the company had opened a little more than one half of all portfolio margin accounts in the first three months such accounts had been offered.

Allowing customers to hold futures in their portfolio margin securities accounts would enable them to offset their holdings’ risks and further use risk-based analysis to reduce their collateral requirements and afford them increased leverage.

At the heart of the debate, however, will be issues over firms’ capital, the protection of the customer and the fate of the customer in the event a brokerage company is forced to declare bankruptcy.

Yet the popularity of portfolio margin accounts is on the increase with customers. Out of a total $380 billion in margin debt as of the end of July, some $58 billion was held as portfolio margin debt according to Finra.

Regulators are starting to approve assets beyond equities and options for margining purposes. That may over time include futures contracts

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Every three years the Bank for International Settlements releases its currency survey covering 54 central banks and monetary agencies around the globe. The highly anticipated survey is closely watched by forex participants to determine emerging industry trends. This year’s survey revealed a huge increase in daily currency transactions to $3.2 trillion per day from $1.9 trillion a year ago. The survey revealed an increase in use by hedge funds, institutional traders and retail investors alike.

“I think the bottom line can be summed up in one single word: volatility,” says Andrew Wilkinson of Interactive Brokers. “Traders, and apparently retail traders, too, love volatility. We’ve noticed the rise in volume on currency futures and how that’s feeding through to options activity and liquidity.”

U.S. investors continue to look to currency trading as a way of diversifying their investments away from the dollar, which has been losing value. Brokerage companies have used various methods to deliver customer access to online currency trading. Interactive Brokers allows its customers to trade forex from its Universal Account side-by-side with options, equities, futures and bonds using low cost and superior technology.

“Foreign exchange is a bit of a ‘Field of Dreams’ in a sense,” Wilkinson says. “Retail traders have shown an appetite for risk and brisk movements in underlying instruments.
FX certainly affords that, and product innovators — from brokerages to exchanges — have built on the mantra, ‘If you build it, they will come.’”

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The first half of 2007 saw U.S. equity indexes rise between 6 and 10%, but investors overseas fared better. Many scored double-digit gains and are at the root cause as to why U.S. investors are looking abroad to buy some of the 50,000 foreign companies available. While access to investing in foreign companies can be achieved through mutual funds, ETFs or even American Depositary Receipts, the point is that buying stocks denominated in foreign currency has boosted returns in many instances.

Many major U.S. brokerages offer overseas access but there’s a great deal of difference between the level of both service and cost of trading overseas. Interactive Brokers has offered unparalleled direct access in global stocks via over three dozen overseas exchanges. Using the Universal Account investors can trade global stocks on the same Web page as other instruments from domestic stocks and options to futures, currencies, bonds and commodities.

Interactive Brokers offers extremely low commissions from $0.005 to $0.05 per shares depending on trade size and subject to a minimum of $1.00. While many competing domestic brokers offer online broking, some are still restricted to phone execution and in either case fees can be high. Interactive Brokers on the other hand is one of the only U.S.-based online trading sites for global stocks whose Universal Account has no account minimums or trade requirements.

Most companies require investors to convert trading capital before buying shares priced in local currency. Interactive Brokers Universal Account allows holders to convert some or all of their trading capital into a foreign currency. Alternatively trades can be settled at the time of purchase by converting dollars into the local currency. That choice remains with the customer.

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The launch of portfolio margining possibly marks the largest change to margin rules since the Securities Exchange Act of 1934 was introduced. Customers can take significantly larger positions in their accounts at a lower cost and can, therefore, take on more risk. That increased risk to manage may account for why broker-dealers are slow to adopt the new rules. However, several broker-dealers have been swift out-of the-gate to embrace the new rules and indeed some companies such as Interactive Brokers have been employing real-time portfolio margining all along.

Other companies note that sophisticated individual investors along with midsize professional trading groups and hedge funds are typical candidates for account openings. Some also conclude that because capital can be more efficiently deployed across trading strategies some companies may even recruit more trading specialists.

Under old Federal Reserve Regulation T rules initial margin requirements stood at 50 percent of invested capital. Thereafter NYSE rules required 25 percent maintenance margin. But the explosion of hedging and speculative instruments, especially traded options has provided traders a way of taking less risky and even market neutral positions. Hence the logical desire and ability to reduce margin requirements. Previously some broker-dealers would construct joint back offices – registered or located offshore where margin requirements were lower. Now, several of these are opting to switch over to the new rules and are trading in their licenses as they adapt to the new landscape.

Options firms have most to benefit when it comes promoting the new regime to their clients. Margin requirements on some strategies have fallen as much as 92 percent. On a transaction previously requiring margin of around half a million dollars, an investor would need to hand over less than $40,000 for the same transaction.

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Online brokerage companies have added a mix of tools and initiatives to help keep customers ahead of the competition in 2007. Interactive Brokers Group was one of the first brokers ready, willing and able to offer updated rules for the calculation of securities-margin requirements following rule changes announced by the Securities and Exchange Commission. Thanks to Interactive Broker’s real-time margin technology, the company affords its clients to safely increase their leverage in some cases.

The company also announced the winners of its second annual Collegiate Trading Olympiad where 204 students participated in an effort to turn a phantom $100,000 trading account into a small fortune. College students were asked to design and write an automatic trading program that would run over an eight-week period earlier this year using program-trading applications in C++, Java and Excel. This year’s winner was Brian Eckerly of Ohio State, who generated $294,190 during the contest.

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Interactive Brokers Reports Trading Contest Results
(Ivy Schmerken)

Interactive Brokers (IB) reported the results of its 2007 Collegiate Trading Olympiad with the top three winners creating automated trading programs utilizing different strategies with stocks and options and futures.

Brian Eckerly, 22, who won first place, received $100,000 in prize money. Eckerly recently graduated from Ohio State University with a degree in electrical and computer engineering. Eckerly traded a mix of stocks and options, using S&P 500 ETFs and the options on that, earning a profit of $294,190.

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Jumpy Investors Gain Reasons To Look Abroad
(Jane J. Kim and Aaron Lucchetti)

Investment advisers and regulators are finding ways to encourage people to invest more abroad, even though investors are jumpy about foreign stocks.

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Jon Wilson, a software consultant in Cedar Rapids, Iowa, says the ability to buy stocks directly on the foreign exchanges was a key factor that prompted him to start trading foreign stocks with Interactive Brokers LLC, a brokerage aimed at professional traders. "It's what buys you real-time transaction capabilities and it's what gets you the least fees," he says.

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Options Algorithmic Trades Give Goldman, UBS Edge Over Brokers
(Edgar Ortega)

Kevin Fischer spent 17 years as a floor trader at the Philadelphia Stock Exchange until Interactive Brokers Group Inc. moved him to its headquarters in Greenwich, Connecticut.

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FIA Inducts 19 Individuals to Futures Hall of Fame

The Futures Industry Association today announced the induction of 19 members into the Futures Hall of Fame. They join 55 other honorees in the Hall of Fame, which was established in 2005 on the occasion of the FIA’s 50th anniversary. The 19 new members were honored at a special dinner and awards ceremony during the 32nd annual International Futures Industry Conference in Boca Raton, Fla.

The FIA's Futures Hall of Fame was established to celebrate the accomplishments and recognize the significant contributions that certain individuals have made to the futures and options industry over the course of its history. The 19 individuals honored in this year's ceremony helped lay the foundation for the industry’s extraordinary success and deserve the highest gratitude and respect.

The following individuals were inducted into the Hall of Fame:

• Patrick H. Arbor
• Louis Moore Bacon
• John Damgard
• William B. 'Billy' Dunavant, Jr.
• Charles 'Harry' Falk (awarded posthumously)
• Stanley Fink
• Jörg Franke
• George F. Haase, Jr.
• Adrian C. 'Ace' Israel (awarded posthumously)
• Celesta Jurkovich
• K.K. Kodama
• James J. McNulty
• Robert J. O'Brien, Sr.
• William F. O’Connor (awarded posthumously)
• Thomas Peterffy
• John F. 'Jack' Sandner
• Myron S. Scholes
• Ang Swee Tian
• Brian Williamson

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GLOBAL INVESTOR: Should You Be Buying Local Shares On Foreign Markets?
(Barbara Kollmeyer )

One of the benefits of sticking to an international mutual fund is that on a day like Tuesday, when China stocks sank almost 9% and triggered a global meltdown of markets, you may not feel the pain right away.

Of course, no pain, no gain, right? If you are one of the few U.S. investors who trade and sell international stocks on your own, that's a mantra you need to believe. But there may be a few more investors joining the ranks of direct traders in foreign stocks following moves by E-Trade Financial Corp. last week.

................................

Steve Sanders, senior vice president of marketing and product development at Interactive Brokers, said his company has been offering what E-Trade is now introducing for more than five years as well as trading in stock options, futures, foreign exchange and bonds for over 60 markets worldwide.

Interactive Brokers courts the professional market while E-Trade is taking square aim at the retail investor. A minimum investment for Interactive Brokers is $5,000 and "the type of customer we try to attract is somebody who does their homework...if you're not a professional, an ADR may be enough," said Sanders.

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Stock Trades Without Borders
Investing on exchanges worldwide is finally becoming simple—and cheap
(Lewis Braham)

Buying stocks that trade only on foreign exchanges can be a hassle. Usually you have to call your broker, who will charge as much as $100 for the trade, plus a fee to convert your dollars to euros, yen, or whatever currency you need. That's why many people wind up investing in foreign companies that have American depositary receipts (ADRs), shares that trade on Wall Street in U.S. dollars. But that limits your choices to about 500 companies. Some world-class outfits, including Samsung and BMW Group, don't even have ADRs.

........

EVEN CHEAPER
while the global account is less costly than many others, it's not the cheapest. Interactive Brokers, which offers trades in 10 markets, has generally lower commissions. Interactive also has significantly lower costs for currency exchanges. E*Trade's fee for buying $10,000 worth of euros is 1.25%, or $125, but you wouldn't see it on your statement. The fee, which declines as the trades get larger, is rolled into the cost. At Interactive, the same euro purchase would cost just $2.50, and it's indicated on the statement.

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Penny Trading Pilot Live: Relatively small scale keeps data challenges manageable
(Alexa Jaworski)

The much anticipated trial of penny-increment options trading began Jan. 26 at the six U.S. options exchanges. The pilot involves 13 stocks and exchange-traded funds (ETFs), and trading increments will be 1 cent for options at less than $3 and 5 cents for options trading at $3 or more. An exception is the Nasdaq 100 ETF, or QQQQ, which will trade in penny increments at all prices.

.....

Ahead of the Game

High-tech brokerage firm Interactive Brokers (IB) of Greenwich, Conn. sought to blaze a trail in penny options last October by cutting the minimum price difference for U.S. listed options from a nickel to a penny (or $5 per contract to $1 per contract). Interactive Brokers said at the time that it was "jumping the gun, and in a first for the U.S. options industry, will make penny pricing on options available." The firm developed a system to allow customers and liquidity providers to display penny prices and to try to trade against other participants' penny prices displayed in the IB system.

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Options Broker Says Industry's Penny Pilot Not Enough
(Peter Chapman)

Interactive Brokers (IB) doesn't believe that trading options in pennies should be held back by technological constraints, so it has started a service that lets its customers trade all options in penny increments.

Click here to read more.

Euro Currency Options on PHLX; Timber Hill Is Specialist
(Alexa Jaworski)

"The Philadelphia Stock Exchange (PHLX), which pioneered and introduced the concept of exchange-traded currency options in 1982 for securities account holders, has begun trading World Currency Options on the Euro.

The U.S.-dollar-settled euro currency options, which started trading Monday with the symbol XDE, are quoted in terms of U.S. dollars per unit of the underlying currency, and the premium is paid and received in dollars. Timber Hill, an affiliate of Greenwich, Conn.-based Interactive Brokers Group, is the specialist."

...

"With the growth of the cash forex market, especially in the retail segment over the last few years, this is a great product to complement cash forex,” said Steven Sanders, managing director of business development at Interactive Brokers. "PHLX years ago offered this on a live trading floor, and it was very popular, but with the introduction of the euro, it died away. Certainly floor-traded forex options is not something the retail market would be interested in, but an electronic forex market is something they would be extremely interested in, so we think this will be a very popular product."

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Portfolio Margining Approved by SEC
(John Hintze)

"The Securities and Exchange Commission has approved much-anticipated changes to portfolio margining accounts, enabling investors to employ significantly more leverage while placing greater responsibility on broker-dealers to control the risk. The policy brings a sea change to securities margining rules that, in the case of equities, appears to open a way for sophisticated investors to get around existing Regulation T rules."

...

"The approval of equities in such accounts gives broker-dealers an opportunity to serve a much broader base of investors. Several high-tech brokerages catering in part to retail investors, including optionsXpress, Penson Worldwide and Interactive Brokers, have already begun preparing their systems to incorporate riskbased models and developing policies and procedures to submit for regulatory approval."

...

"One way to ensure creditworthiness is to require a minimum amount of equity in the portfolio margining account. In September, Greenwich, Conn.'s Interactive Brokers was considering a $50,000 minimum, but its margining system's ability to stress-test and even enforce margin calls by liquidating positions in real time may be a mitigating factor. "The stress test may be enough, and we may not require any minimum," said Steve Sanders, managing director of business development at Interactive Brokers."

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Forgotten Amex Hopes to Erase Bad Memories --- Exchange Aims for IPO in '07, Recovery of Traders' Confidence After Tackling Technology Deficit
(Aaron Lucchetti)

THE AMERICAN STOCK Exchange is the market that exchange mania forgot.

…

"Recently, Amex has taken some steps to turn around its business. It sold its minority stake in financial-technology provider Securities Industry Automation Corp. to majority owner NYSE, giving the Amex $40 million and control over its own technology. Amex is rolling out new electronic-trading capability and has signed agreements with three big trading firms to buy and sell options electronically on the exchange."

…

"In options, Amex has brought in well-capitalized firms that prefer to trade from their own offices electronically. One such firm, Interactive Brokers Group, now sends about 8% of its customer options business to Amex, up from 2%. "They've departed from their original way of holding everything for the floor traders," says Thomas Peterffy, Interactive Brokers' chairman."

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OPTIONS REPORT: New Margin Rules Affect Options Traders
(Mohammed Hadi)

NEW YORK (Dow Jones)--In a move that is sure to create a splash in the options industry, the Securities and Exchange Commission has approved long-awaited changes to the way brokers can assess margin requirements.

"The new rules better reflect the risk in a portfolio," explained Steve Sanders, managing director of business development and marketing for Interactive Brokers Group.

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The New Penny Options
(Theresa W. Carey)

"Remember the hubbub over the decimalization of stock prices back in 2000? Well, get ready for a little deja vu, because it's coming to the options market early next year.

Options are currently priced in increments of a nickel, which means that a one-tick change in price changes the overall cost of a single contract by $5. (Each contract gives the right to buy or sell 100 shares of underlying stock.) Cutting the increment to a penny means that a one-tick change alters the price by $1.

More aggressive exchanges that help a trader get price improvement on a trade -- that is, an increase in the selling price or a decrease in the buying price -- are likely to find even greater flexibility in pricing when a contract is priced in the new, smaller increments. The net result should be a cost saving to investors, as well as an opportunity to turn a profit on smaller price moves."

...

"Interactive Brokers (www.interactivebrokers.com) is taking the penny pricing a step further and allowing customers to trade options with each other on most contracts, not just the 13 in the test. Only account-holders can place trades -- but even noncustomers can see what's available, since the exchanges require brokers to make the information publicly available.

IB rolled out its penny options-trading system in mid-October, and it's seen a lot of volume and good liquidity, according to Steve Sanders, managing director. "I'm excited about this one," he says. "This is one of those things that really changes the industry."

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What Free Trading Costs
(Theresa W. Carey)

"Stocks of rival online brokers went into a tailspin recently, after Bank of America announced that it would offer commission-free trading through Banc of America Investment Services to customers with more than $25,000 in bank deposits. The shares have rebounded, but their dramatic reaction suggests that this might be an offer many electronic investors and traders would jump at. But are free trades a free lunch?"

…

"Drilling down into the Zecco offer, for instance, we find that customers receive 1% interest -- on any cash balance -- on the low side. And BofA pays just 0.35% on balances under $10,000, and about 1.5% on amounts between $25,000 and $50,000. Even Interactive Brokers ( www.interactivebrokers.com ), which has kept trading costs low for its customers for years, pays upward of 4% on cash balances at present. (The exact formula depends on how much cash is held in an account.)"

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Online Discount Brokers: Disintermediation Won't Strike Evenly
(Daniele Guerini)

"A good deal has been said in the past few weeks about the disintermediation of the online discount brokerage industry. Bank of America (BAC) and Zecco.com roiled the market with the introduction of the "free trade era," leaving some concerned about their investments in Ameritrade (AMTD), E*Trade (ET) and Charles Schwab (SCHW)."

"The market probably overreacted to the news and now those stock have seemed to recover, but there is still a lot of uncertainty on the future of the industry."

…

"Regarding other online discount brokers, I would feel more safe for at least a couple of reasons:

• Low cost providers have been around for a while: think of Interactive Brokers, whose commission on US stocks is $0.005 per share. The company has been offering for years a low cost / technology based service addressed mainly at high volume traders. An important lesson: the market is not a homogeneous entity but it is fairly segmented. There are option traders (they are more likely to use OptionsXpress or Thinkorswim), there are heavy traders (those who use Interactive Brokers or Zecco) and investors looking for a broad range of services who are probably less price sensitive. Ameritrade, E*Trade and Charles Schwab are more likely to attract this type of clientele and therefore are less affected by this free trade revolution."

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Nazareth: Penny Pilot Will Yield Useful Analysis
(Editorial Staff )

"The options industry is moving rapidly toward penny pricing increments--a development jump-started in May by discussions at the Options Industry Conference in Miami, including a speech on the subject by Elizabeth K. King, associate director of the Securities and Exchange Commission's division of market regulation. The following month, SEC chairman Christopher Cox formally asked the U.S. options exchanges to begin a penny pricing pilot in January, and one prominent firm, Interactive Brokers, has already instituted the practice on its own. SEC commissioner Annette L. Nazareth returned to the subject at the Securities Industry Association's options market structure conference Oct. 24 in New York. These are excerpts from Nazareth's remarks."

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Bids & Offers: Tech Analyst Sherlund Plans Walk on the Buy Side; AmEx Launches Corporate Credit Card in China
(Peter A. McKay)

Pennies From Brokerages

"LIKE THE STOCK markets a few years ago, traditional floor-based options exchanges are preparing to price their contracts in pennies rather than larger increments. An industrywide experiment with pennies is slated for January, but a few options firms are jumping the gun."

"Interactive Brokers said it will offer penny-based prices on trades via both ISE and BOX, which offers a "price improvement" mini-auction after a trade is executed between two parties."

Click here to read more

Interactive Brokers Launches Penny Prices for Options
(Jacob Bunge, Financial Correspondent)

"The Securities and Exchange Commission has approved a 2007 pilot program to reduce minimum price differences on options to one cent, but Interactive Brokers LLC last week sprung out of the gate and introduced a new system offering penny pricing on all options, according to Managing Director Steve Sanders."

"The SEC-mandated pilot will begin Jan. 27, 2007 at six U.S. options exchanges, and will include options listed on 13 underlying stocks. But Interactive Brokers, citing years of pressure for direct market access providers and online brokers to cut prices, saw no reason to delay penny pricing any longer and launched its own penny pricing system on Oct. 24."

" Customers have been looking for this, but I don't think they realized it could be done today," Mr. Sanders said in an interview. "We believe that this is the way the industry is going?obviously that's what happened with stocks, and with this penny pilot [program], the talk about it has been dragging on and on, and we decided since we could do this right away, we'd get out in front of it and not wait for the rest of the industry."

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IB Launches Penny Options Trading

"Interactive Brokers, one of the largest discount options brokerages, this week started accepting options orders in pennies in a first-ever such experiment. Most brokerages aren't expected to pick up penny options trading until at least next year. "Our customers don't want to wait, and are demanding trading in pennies now," said Thomas Peterffy, chairman. The electronic options brokerage has been at the forefront of most options trading technology, including smart order routing and hidden, or "iceberg", orders."

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View From Timber Hill
(Steven M. Sears)

"IN THE OPTIONS MARKET, Timber Hill is credited with being among the first, if not the first, trading firm to use computers to price and trade options. Technology is taken for granted now, but once there was a time when computers were so unusual on the trading floor that other traders thought anyone who used them was wacky. This was a time when trading was dominated by floor-trading cliques who controlled the rules and set the tone."

"Now, Timber Hill trading firm has given birth to Interactive Brokers, which among other activities, offers online discount brokerage and access to world capital markets. At the center of Timber Hill (now a unit of Interactive Brokers LLC), is a group of quiet, mild tempered traders who direct trading in a staggering number of securities. Jeff Shaw leads the group, and he agreed to speak with SmartMoney.com to offer some insight into options trading from his perspective."

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Interactive Brokers ready for penny trading

"Interactive Brokers Group, an online broker offering bonds, futures, options and equities, said on Tuesday it is ready for penny trading ahead of the expected January introduction of penny price points in the U.S. options market.

Interactive Brokers said it had built a system that will allow option orders from its customers and liquidity providers to be displayed in a penny price format, a move that is expected to save customers money.

In addition, the system will enable those penny orders to be sent to an options exchange for execution."

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In comparing fees, look for the *
(Paul Brent)

If you're thinking that it's finally time to turn that underused home computer into your own personal stock exchange, the good news is it has never been a better time to invest online.

If price rather than service is your major concern, there is an undisputed price leader quietly operating in cyberspace. Interactive Brokers Canada is the undisputed price leader when stacked up against even the most price conscious discount brokerage. Thanks to its U.S. parent's three-decade history, it has far-reaching tentacles (you can trade on 60 exchanges around the world) and rock-bottom pricing.

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ISE Plans to List Foreign Currency Options; ISE FX Options(TM) Offer New Investment Strategy
Business Wire

International Securities Exchange (ISE) today announced its intent to create and list new foreign currency options, called ISE FX Options(TM). With ISE FX Options, retail and institutional investors will have a new investment strategy that allows them to express their views on the strength or weakness of the U.S. Dollar relative to foreign currencies.

Interactive Brokers, currently a primary market maker on the ISE options exchange, will become a market maker in the new ISE FX Options product through its Timber Hill subsidiary. "As usual, ISE continues to further the advancement of electronic trading and Interactive Brokers fully supports these efforts. The new cash-settled currency options are a first for listed electronic trading, and will be welcomed as a complementary product for those traders who already trade the cash and futures forex markets electronically," said Steve Sanders, Managing Director for Business Development at Interactive Brokers.

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OCC News
(Newsletter of The Options Clearing Corporation)

Industry Insight

Thomas Peterffy emigrated from Hungary to the United States in 1965. After working for 10 years as a computer programmer, he became a member of The American Stock Exchange (AMEX) in 1977. As an individual floor trader, he founded the firm known today as Interactive Brokers Group, a global electronic broker dealer. As Chief Executive Officer, Mr. Peterffy is active in the day-to-day management of the company.

Mr. Peterffy received the Joseph W. Sullivan Award at the 24 th Annual Options Industry Conference in May. OCC News took the opportunity to discuss Mr. Peterffy’s career in the options industry and other issues, including his views on electronic trading.

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CBOE Takes on New York
Yesenia Salcedo

"Steve Sanders, managing director, marketing and business development at Interactive Brokers, says, "Anything that pushes the industry forward is a good thing. We invest in exchanges not specifically for profit but because we’re pushing that electronic envelope will help us offer a new venue for trading to our customers, and the more venues we can offer results in better price execution for our customers."

Read more. (http://www.futuresmag.com)

Refreshing the Screen
(Theresa W. Carey)

BETTER. FASTER. NEW AND IMPROVED. MORE POWERFUL. Software publishers survive by adding features and products to entice you to join their team, maintain your loyalty (if you're already onboard) or come back (if you've signed on with a rival). Here are a variety of software publishers and online brokers striving for your attention—and your business.

INTERACTIVE BROKERS (www.interactivebrokers.com) has spruced up its tools for options traders by providing a new service, Options Intelligence Report, as well as volatility trading functionality.

Click here to read more

Higher Bid for FileNet Is Awaited
Mohammed Hadi

"There are certain names that option traders have been conditioned to just assume a takeover," said Steve Sosnick, a trader at the Timber Hill division of Interactive Brokers Group. "This is one of them." -Steve Sosnick, Interactive Brokers

AIG Shares Fall on Fear of Drop in Japan Earnings
Doris Frankel and Ed Leefeldt

"After the last earnings release, AIG stock fell roughly 5 percent. And options traders today are positioning themselves as though a similar drop in shares could happen again," said Steve Sosnick, equity risk manager at Timber Hill, a division of Interactive Brokers. "Option volatilities have risen dramatically and put buyers were very aggressive this morning." -Steve Sosnick, Interactive Brokers

Read more. (http://www.reuters.com)

More Bells Are Ringing
Alexa Jaworski

"Steve Sanders, head of business development at Interactive Brokers in Greenwich, Conn., noted that his company has made a number of investments in strategic exchange partnerships to help foster innovation in the securities and commodities industry: the Boston Options Exchange, ISE Stock Exchange, single-stock futures market OneChicago and now CBSX."

Read more. (http://www.securitiesindustry.com/)

Phelps Dodge Calls Draw a Flurry
Mohammed Hadi

Driving up the stock and options on Phelps Dodge Corp. yesterday, traders furiously speculated on what could be in store for the copper miner.

…

"I definitely saw a significant wave of buying, and it smelled speculative," noted Steve Sosnick, equity risk manager at Timber Hill, a division of Interactive Brokers Group.

Read more. (http://www.wsj.com)

CBOT Begins Side-By-Side Era Of Benchmark Ag Products
Andrew Johnson

"The electronic side of the market opens up new opportunities for CBOT agriculture markets, as traders that shied away from the open outcry market due the lack of exposure to bid and offers in the pit will be more willing to participate technological changes and automation, and electronic markets." –Steve Sanders, Interactive Brokers

Read more. (http:www.dowjones.com)

CBOE to Launch Stock Exchange
Yesenia Salcedo

"We invest in exchanges not specifically for profit reasons but because we’re pushing that electronic envelop," says Steve Sanders, managing director, marketing and business development at Interactive Brokers. "The CBOE Stock Exchange will help us offer a new venue for trading to our customers, and the more venues we can offer results in better price execution for our customers." –Steve Sanders, Interactive Brokers

Read more. (http://www.futuresmag.com)

CBOE to Try Stock Trading
Chris Clair

The Chicago Board Options Exchange on Thursday announced plans to begin trading equities by early 2007 via a hybrid electronic and open outcry trading system.

The CBOE Stock Exchange LLC, as the entity will be known, is actually a collaboration between the CBOE and four partners, each of which has taken a monetary stake in the new venture. Those partners are VDM Specialists LLC, Interactive Brokers Group LLC, LaBranche & Co. Inc., and Susquehanna International Group LLP.

....

The CBOE's insistence on including open outcry in the new venture is notable given the presence of Interactive Brokers as one of the partners. Interactive Brokers is also a partner in the ISE's all-electronic stock exchange, and Steven J. Sanders, managing director for marketing and business development for Interactive Brokers, said his firm wanted to get involved in both projects specifically as a way to push markets toward electronic trading.

"We have stakes in a number of exchanges," Mr. Sanders said, among them OneChicago and the Boston Options Exchange, as well as of course the ISE and CBOE initiatives. "From our point of view, we like to hook up liquidity to our smart router. If we can do a trade faster and cheaper, that's our goal. We invest in these ventures not because we're going to make a lot of money off them, but because we want to push the industry to do things more efficiently. It's another opportunity for us to have a say in that."

Read more (www.hedgeworld.com)

The Best E-Broker for You
(Lewis Braham)

The price of a trade is just the start. Here's what you need to know to choose wisely.

Active Investors
Talk about cheap. At Interactive Brokers, a stock trade costs 0.5 cents a share, with a minimum of a $1 trade. That's below what most institutional investors pay.

Click here to read more.

Christmas in July
(Kopin Tan, Robin Goldwyn Blumenthal)

BY HIS OWN ADMISSION, Patrick Christmas is "overqualified on computers and underqualified in finance." But that didn't stop the 26-year-old grad student from turning $100,000 in hypothetical cash into $219,465.93 in 10 weeks, to win the 2006 Program Trading Olympiad run by Interactive Brokers.

Click here to read more.

A Less Than Glorious Post-Fourth of July
(Kopin Tan)

Fireworks light up the sky, but all that pomp and incandescence can leave the night quieter and darker after the last flare fades.

Hope for a summer rally had been kindled by the stock surge that capped the weary month of June, but traders returning from the July 4 break opted for a grimmer view. Good vibes from the holiday and the Discovery liftoff were countered by unsettling news of North Korea's nuclear-missile tests. Crude oil touched a record $75.78. Friday'sreport showing 121,000 new jobs created in June, well short of the 175,000 forecast, might have assuaged inflation fears. Instead, stock sellers viewed it as yet more evidence of an economy cooling too quickly.

...

No surprise, then, to see EFPs becoming widespread over the past year as rates rise. At OneChicago, the three-year-old market for trading single-stock futures, EFPs drive a significant part of volume, although the exchange won't disclose specifics. Even so, they are executed manually. Traders must phone or fax in their orders, which are filled in both the stock and futures markets.

Interactive Brokers now allows electronic trading of EFPs. The EFP cost is displayed as an interest percentage -- to allow the investor a more direct comparison against broker financing.

By IB's reckoning, the average investor who holds, say, one Microsoft share over 60 days -- with the stipulated 25% of the stock's value held in cash as margin -- pays about 32 cents in borrowing costs. Factoring in about nine cents in dividends earned during the period, the total stock financing cost would amount to 23 cents.

In comparison, the cost for holding a single-stock future over two months is about 17 cents, plus another penny in commission. But after adding in the two cents in interest earned on margin balance, the final 16 cents-a-share number produces a cost saving of seven cents a share. Similarly, a short-stock holding could earn about 19 cents a share in extra cash, IB estimates.

Whether EFPs find widespread favor remains to be seen. But rising rates and the growing liquidity in the single-stock futures market make them attractive, despite some pooh-poohing from brokerages worried that EFPs might hurt their profits.

And Interactive Brokers isn't the only firm intrigued by their potential. Marty Doyle, OneChicago's president, says the exchange plans to automate EFP trading -- probably this quarter.

Click here to read more.

How To Buy From Afar
(Matthew Rand)

Buying Locally Listed Shares

One company that wants to change the viability of buying shares in foreign markets is Interactive Brokers, of Greenwich, Conn., which offers individual investors stock trading on 25 market centers globally, including the Tokyo, Frankfurt and London stock exchanges. Originally formed in the late 1970s, the company found its footing as an options-trading business called Timber Hill. Interactive Brokers has built direct electronic routing systems to the foreign exchanges it deals with, meaning that it doesn't incur the kind of costs that would make foreign trading prohibitive for a brokerage such as ...

For your foreign trades, Interactive Brokers will get you the best conversion rate of five interbank dealers, and charge you a low per-share trading commission. Already, 26% of Interactive's trading volume comes from individual investors. For example, if you wanted to buy 100 shares of Toyota Motor, which trades at 5,890 yen on the Tokyo exchange, you would pay $1.29 for currency conversion and a $16 commission on the buy (at 0.08% of trade value in Japan).

Click here to read more.

Disruptive CEOs Combine Vision, Strategy & Technology
(Tim Clark, Greg MacSweeney, Cory Levine)

When it comes to market-changing business strategy, technology is no longer an afterthought. The four CEOs profiled on the following pages have proved to be masters at leveraging technology to reshape the market.

...

Since 1977, when Thomas Peterffy left a job developing commodities-trading software to become an operations trader on the AMEX, he has refused to accept the status quo of the trading community. Rather, Peterffy has made it his mission to move the industry away from manual processes and closer to automation.

Click here to read more.

From Rags to Automation
(Tim Clark)

Since 1977, when Thomas Peterffy left a job developing commodities-trading software to become an operations trader on the AMEX, he has refused to accept the status quo of the trading community. Rather, Peterffy has made it his mission to move the industry away from manual processes and closer to automation.

In the process, the one-time refugee from communist Hungary, who was born in the basement of a Budapest hospital during a 1944 bombing raid by the Russians, has constructed Interactive Brokers Group, a global provider of electronic broker-dealer services. In 1965, Peterffy abandoned his engineering studies in Budapest and moved to New York. Though he spoke no English, he soon landed a job as a draftsman designing highways for an engineering firm, where he one day volunteered to program a new computer. Peterffy says his background in computer programming still powers his ideals today.

"I think the way a CEO runs his company is a reflection of his background," says Peterffy. "Business is a collection of processes, and my job is to automate those processes so that they can be done with the greatest amount of efficiency."

Click here to read more.

A Bad Week For the ICE Shares fall as rival Nymex goes electronic and CFTC considers a tighter rein
(Gerelyn Terzo)

The Intercontinental Exchange (ICE) took a double beating last week, as the offshore electronic commodities exchange faced the prospect of losing market share on a key energy futures contract as well as the specter of increased regulation.

...

Some broker-dealers already saw a decline in ICE's fortunes. Steve Sanders, managing director of business development at Interactive Brokers, a Greenwich, Conn.-based global broker-dealer that facilitates trades through both Nymex and ICE, said he observed a shift in market share among Interactive Brokers customers last week.

"Earlier in the year, there were days that ICE's market share was 10-25% on certain products. I noticed in the last two days that it has dropped to below 10%," said Sanders. And last Wednesday, ICE's share was just a little over 8% at Interactive, he added.

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Nasdaq's Live Floor Show
(Theresa W. Carey)

The Nasdaq is more than an electronic stock exchange that allows investors to trade millions of shares a day; increasingly it's a useful trove of data about the sizes and prices of all those transactions.

The U.S.' biggest screen-based equity market now offers a variety of data products such as TotalView, which displays every quote and order at every price level on all Nasdaq National and Capital markets stocks available for execution at the Nasdaq Market Center. That way, traders get a better idea of what the actual market is for these stocks. Several online brokers, including Scottrade and a number who utilize the RealTick electronic trading platform, now offer TotalView to their customers. It is otherwise available for $70 a month for professionals and $14 per month for non-professionals.

...

Interactive Brokers ( www.interactivebrokers.com ) sponsored a Trading Olympiad for college students earlier this year ("Get With the Program," Nov. 7, 2005) in an effort to identify some of the best and brightest up-and-coming techies.

Starting with an account of $100,000 in phantom money, University of Texas graduate student Patrick Christmas earned an additional $120,000 in 10 weeks using computer algorithms he developed for Interactive Brokers' Trader Workstation Application Program Interface.

The victorious Christmas won a very real $50,000, which IB will match in a donation to his grad school in Austin. The electronic brokerage paid out a total of $307,000, including $1,000 each to 100 participants. "Anybody who entered and made a penny won $1,000," says executive vice president Steve Sanders. To top it off, the company hired the fifth place winner, Li Zhiyan, of the University of Toronto.

Any IB customer can open a paper trading account and test to their heart's content, says Sander. "We simulate whether there would be a fill or not (whether an order would be filled), so when someone puts in a limit order we simulate the fill based on whether that price and volume were available," Sander says. Recently, IB added all of its global products to the paper trading platform as well.

New features include Volatility Trader for options traders, and SpreadTrader for futures spread trades. More on these features in a future column.

Click here to read more.

Interactive Brokers Names Top Student Traders
(Ivy Schmerken)

Interactive Brokers Group (IBG) named University of Texas graduate student Patrick Christmas the winner of its first annual electronic trading Olympiad. The 10-week trading contest was open to computer science and engineering majors at North American colleges and universities.

Each participant started with $100,000 in phantom money and was given access to Greenwich, Conn.-based IBG's Trade Workstation Application Program Interface (API), which simulates trading and IBG makes available to professional traders. Participants used IBG's technology to create their own algorithms and generate orders.

Christmas earned $120,000 in profits using his computer algorithms to trade equities. "He had never traded before," says Steve Sanders, IBG's managing director, business development and marketing. "He's a technologist at heart. We find that our most successful people are technologists, not necessarily traders."

Click here to read more.

Cross-Asset Platforms
Interactive Brokers Debuts 'Universal Account'

NEW YORK —Discount broker Interactive Brokers Group (IB) is expanding its trading platform so that it accesses floor-traded products from the Chicago Mercantile Exchange ( CME) and the Chicago Board of Trade (CBOT) as well as stocks from Sweden and Japan.

The CME, CBOT and other venues can be accessed via IB's Universal Account (UA) platform, which enables the trading of multiple products worldwide from a single account. The platform also displays positions and risk in real-time within a single screen, says Steve Sanders, managing director of development. The offering includes a single-base currency that allows for the trading of products in other currencies. Traders either get a loan against the base currency or convert it.

"Most brokers would not want to offer our Universal Account structure because it would mean the end of high mark-ups on non-transparent currency conversions and finance rates, which is where brokers make the bulk of their profits," Sanders says. For instance, Universal Account users will have access to five inter-bank currency dealers, who will route an FX order to the dealer with the best option, he says. Clients can also sidestep the need to buy ADRs.

In terms of technology, adding the additional market access for the expanded product service is relatively simple, Sanders says. "Every exchange is different, but our technologists have been doing this for 20 years, so they might have to modify it a little bit, but once you've done a few of these, you get the hang of it," he says.

Cross-asset trading is not new to IB, say officials at the firm. For the past four years, the firm has been providing global, direct access to stocks, options, futures, foreign exchange (FX), bonds, and exchange traded funds (ETFs) from a single account, officials say.

Chloe Albanesius

Do Floors Have a Future? The computer-age-old question has a nearly unanimous answer: Traditional exchanges are losing--but not quite everything
A spate of recent strategic announcements--by the International Securities Exchange's (ISE) equities offshoot, the Philadelphia Stock Exchange (PHLX), and the New York Mercantile Exchange (Nymex) in a cooperative agreement with the Chicago Mercantile Exchange (CME), to name three--were all about electronics. The movement toward electronic marketplaces with little or no human intervention seems increasingly inexorable, and traditional trading floors increasingly obsolescent.

The conventional wisdom, expressed recently by University of Southern California finance professor and market microstructure expert Lawrence E. Harris, is that "there will likely be few floor-based markets left in a few years. That's not a new story, but it's moving very quickly in that direction." ...

Steve Sanders, managing director of business development and marketing at Greenwich, Conn.-based Interactive Brokers, believes the only reason to keep the floor is to employ the brokers. "If you go to the NYSE or any of the firms with specialists or floor brokers, they'll tell you that for large block orders the human touch does a better job than the computer," he asserted. "But there are all kinds of firms out there trying to replicate what was previously done by a floor trader. The ISE just announced their new electronic exchange [in which Interactive Brokers is a joint-venture partner] that matches at midpoint. You have [buy-side block trading venue] Liquidnet and [Citigroup trading-technology subsidiary] Lava Trading. There are many people addressing what the floor broker does today in more of an electronic manner, but let's face it, only time will tell."

http://www.securitiesindustry.com

Program Trading Averaged 59.3% NYSE Volume May 8-12
The New York Stock Exchange's program trading from May 8 through May 12 accounted for 59.3%, or about 1.03 billion shares, of the average daily volume of about 1.74 billion shares reported for the period.

In all markets last week, the NYSE said program trading by member firms averaged about 1.89 billion shares a day.

About 54.8% of program trading took place on the NYSE, 0.7% in foreign markets and 44.5% in Nasdaq, the American Stock Exchange and other domestic markets.

www.dowjones.com

ISE Options Market Shifts Gears: CEO Krell Turns Toward Equities
Alexa Jaworski

As the first all-electronic options market in the U.S., the International Securities Exchange (ISE) rose to the top of the charts. Launched in May 2000, it quickly challenged the Chicago Board Options Exchange (CBOE) and American Stock Exchange, the historical leaders in options market share, and today ISE is number one in equity options and is close on CBOE's heels in total contracts as reported by the Options Clearing Corp.

Last month ISE dropped a shoe that market observers had anticipated since the day David Krell, an options industry veteran who formerly worked for the CBOE and the New York Stock Exchange, joined with three co-founders to create an options market that was not called International Options Exchange. They had their sights on other products as well, and on April 19 the New York company announced plans to handle equities on an all-electronic ISE Stock Exchange. ISE expects the new exchange to begin operations in the third quarter as the latest industry force shaking up the competitive equilibrium of the NYSE and Nasdaq Stock Market. ISE Stock Exchange has the backing of seven firms that put up a total of $32 million to be minority stakeholders: Bear Stearns & Co., Citadel Derivatives Group, Deutsche Bank, Interactive Brokers Group, JP Morgan Chase & Co., Knight Capital Group and Sun Trading.

http://www.securitiesindustry.com

A Battle Royal A sleek upstart and an entrenched giant are waging all-out war for the soul of the energy trading market
Gerelyn Terzo

"Customers will go where the rates are cheaper, where there is more liquidity," adds Steve Sanders, director of business development at Interactive Brokers, a Greenwich, Conn.-based global broker-dealer that trades a chunk of the world's options and is already hooked into the CME's Globex. "Over the long run, electronic trading will replace floor-based operations. It happened in Europe-those who adapted to electronic trading had a future, and unfortunately those who couldn't did not."

http://www.iddmagazine.com

New Options Algorithms Threaten Traders
Large brokerage firms are actively developing smart-order routing and algorithmic trading technology for options. Banc of America Securities, Goldman Sachs and Interactive Brokers have launched algorithms for options in the past few months, and their competitors are expected to jump into the game shortly. They parcel out options orders automatically to multiple liquidity pools, which diminishes the need for traders to manually send orders to the exchanges. As a result, some traders worry that lucrative derivatives trading jobs that have been secure throughout the layoffs of the past five years will soon disappear.

Most of the brokerages' order flow has thus far been negotiated and executed manually by traders over the phone, the Internet, and the trading pit, unlike in the equities markets that use algorithms and other order routers to disseminate orders. As options volume continues to grow beyond last year's record 1.5 billion contract mark, there is more competition, and it is becoming harder to achieve the best possible price for large blocks of stock without moving the price significantly, said Steve Sanders, managing director with IB. "The most efficient way to compete is by introducing order types that can handle anonymous executions automatically by breaking up the trade," he added.

As a result, trading desks at large brokerages are adapting their hiring patterns. Searches for experienced options traders have already slowed down since last year as firms want to recruit more Ph.D.s and quantitative researchers--not traders--to develop the new technology and run it, said Eric Moskowitz, director with the Options Group, an executive search and consulting firm. "Going forward, we need people with programming skills to serve as pilots watching the [trading] programs," Sanders said. IB, which has 500 options trading employees around the world, has moved many traders to application processing and help centers, he added. BofA and Goldman spokeswomen declined to comment.

But manual options trading won't disappear any time soon. Large and lucrative optional value contracts with a lot of spread, such as options on the S&P 500, still trade largely in open outcry, which forces brokerages to maintain some floor staff. Also, electronic trading functionality for trading large block orders against large equity blocks is extremely limited, so firms still need experienced trading staff to negotiate prices, said John Gelbard, senior v.p. of I.A. Englander, one of the largest derivatives brokerages.

ISE Announces Equities Exchange; Liquidnet Names Liquidity Partners
In the late 1990s, when David Krell, William Porter, Marty Averbuch and Gary Katz were laying plans for the first electronic options exchange in the U.S., they named their Wall Street-based venture International Securities Exchange. Last Wednesday they demonstrated why they didn't call it the International Options Exchange: They unveiled plans to enter the equities market with the all-electronic ISE Stock Exchange, with backing from seven ISE broker-dealer members.

The next day, a few miles uptown, Liquidnet, another product of the technology boom that directed its energies to transforming inefficient market models, said that nine liquidity providers had signed on as partners for Liquidnet H2O, the new version of its block trading platform for asset managers.

The coincidence underscores the maturation of what once seemed to be daring, high-tech upstarts, and how the securities industry now routinely embraces these and other electronic marketplaces and is pushing in the same direction. Rallying behind Liquidnet as "streaming liquidity partners" were Bloomberg Tradebook, Bank of New York Co.'s BNY Brokerage, Instinet, FutureTrade, Miletus Trading, Piper Jaffray, EdgeTrade, UNX and Goldman Sachs Execution & Clearing--a collective vote of confidence in Liquidnet and the vision of its founder and CEO, Seth Merrin.

For the new stock exchange that ISE expects to introduce with a product called MidPoint Match (MPM) in the third quarter, these firms put up $32 million in start-up capital and will share a minority ownership position: Bear Stearns & Co., Citadel Derivatives Group, Deutsche Bank, Interactive Brokers Group, JP Morgan Chase & Co., Knight Capital Group and Sun Trading. Some of those names are familiar as backers of other electronic market initiatives, reflecting the desire of some of Wall Street's most powerful institutions to promote innovation and keep regional exchanges such as those in Boston and Philadelphia competitive with the New York Stock Exchange and Nasdaq Stock Market. For example, Citadel Derivatives Group, affiliated with a major Chicago-based hedge fund, has also invested in the Philadelphia Stock Exchange; and Interactive Brokers and JP Morgan are backers of the Boston Options Exchange (BOX).

"This is truly a milestone in the ISE's history," Krell, ISE's president and CEO, said during a conference call last week. (His co-founder Katz is COO; Porter, a former chairman of E-Trade and now managing member of Casey Securities, is an ISE director; and Averbuch, also formerly of E-Trade, is president and CEO of market-maker Adirondack Trading Partners.) "As you know," Krell went on, "I've always spoken about strategy to expand into other asset classes and complementary businesses. As part of this strategy we focus on broadening our business into areas that allow us to leverage our management expertise, our infrastructure and business relationships we forged with building our options business."

Krell noted that the ISE's investment philosophy is to only enter markets or launch a new business in which the company can create or contribute something unique. "As has always been the case at ISE, any new undertaking that we embark on must pass a very rigorous and disciplined screening process," he explained. "First we must be sure there is demand in the marketplace. Second, we must have some expertise or be able to obtain that expertise. And third, it must be profitable. I can ensure you that ISE Stock Exchange meets all three of these criteria."

ISE opened in 2000; within two years its fully electronic operation was challenging the Chicago Board Options Exchange (CBOE) and American Stock Exchange for options supremacy, and it is now the biggest equity options exchange in the world. ISE listed its shares on the New York Stock Exchange in March 2005. The price on the day of the ISE Stock Exchange announcement shot up $3.54, or 8.5 percent, to $45.27. It closed the next day, Thursday, at $44.55, which is $8.31 below the 52-week high.

With a market capitalization around $1.7 billion, ISE isn't much of a match for the Chicago Mercantile Exchange's $17 billion or NYSE Group's $11.6 billion, but it's clearly big enough to invest in growth and be a factor in the exchange industry's ongoing consolidation. The magnitude of the stock exchange initiative is bigger than the last transaction ISE announced, on April 6, which was also a partnership: It acquired intellectual property and other assets of Longitude, a New York-based developer of technology for conducting auctions in derivatives based on economic indicators and other nontraditional "events," for an undisclosed price, with Goldman Sachs taking a minority investment position.

Need for an Alternative
Until last week, Krell and his management team had only hinted at their intention to move into equities, even while major system development work was underway, preferring to announce their plan when it was fully formed and ready to be submitted to the Securities and Exchange Commission for approval. Krell said the strategy was precipitated by technological and marketplace changes such as algorithmic trading and direct-market access that create opportunities for an automated alternative trading platform. "We also recognize that investor demand for faster and anonymous execution is very much akin to investor demands that we witnessed in the options industry only a few short years ago," he said. "We believe that the ISE Stock Exchange will meet the same investor needs in the equity space."

"We have built a fully electronic exchange from the ground up that will promote competition, foster innovation, improve the overall market and transform the way that equities are traded," Krell said in the press announcement.

ISE Stock Exchange partner Interactive Brokers has invested not only in the Boston Stock Exchange offshoot BOX, but also recently joined the CME, CBOE and Chicago Board of Trade as a co-owner of the OneChicago single-stock futures market. "Our purpose in investing in exchanges is not to make a profit; our first goal was to try to further the push of efficient electronic markets," said Steve Sanders, managing director of business development at Greenwich, Conn.-based Interactive Brokers. "We are investing in ISE Stock Exchange because we're very excited about this new matching engine that fills at the midpoint"--and to have a say in the exchange's future, he added.

ISE expects to introduce the patent-pending MPM, a continuous, instantaneous, fully automated and anonymous matching platform, early in the third quarter. It will execute at the midpoint price of the national best bid and offer throughout the trading day all round-lot orders, large and small, and it is especially suited for orders generated by algorithms, ISE said. MPM will be followed in the fourth quarter by an integrated displayed market offering. "Together these two differentiated offerings will enhance the automated electronic trading strategies that continue to proliferate in today's equities markets," Krell said.

Joe Gawronski, COO of Rosenblatt Securities, a New York agency brokerage, noted that the ISE showed its hand as a potential stock market when it applied last fall to be part of both the Consolidated Tape Association and Unlisted Trading Privileges plans for price dissemination. "Joining CTA-UTP telegraphed that new equity products were coming soon," he said. "Also, the choice of the International Securities Exchange name was no accident. I don't think the ISE wanted to limit itself to trading just domestically or to any particular type of instrument like options."

Liquidnet, which opened in 2001 as a network for buy-side firms to complete block trades on a direct, peer-to-peer basis, through this year's first quarter traded a cumulative $544 billion in U.S. equities with an average trade value of $1.15 million. The average trade size, in tens of thousands of shares, dwarfs the 400 or fewer on the major stock exchanges, indicating that Liquidnet has succeeded at making trading life easier for its users. Liquidnet H2O, which was rolled out selectively last September and recently went into general release, was designed to "bring together the entire institutional equities market in a single venue," according to Merrin. "Our members' orders can now simultaneously interact with the largest pool of natural liquidity in the industry as well as smaller, execution-bound orders while providing price improvement on every execution."

"Our [streaming liquidity] partners get to provide their clients with a better midpoint execution, which is huge for them," explained Steve Greenblatt, VP of corporate strategy at Liquidnet. He expects to add other partners that are now in testing or early stages of discussions. "For our clients, it allows the buy-side trader to maintain total control over his order," he added. "So rather than having to take an order and slice and dice it out into the market, he gets to create an order that he is in control of and soak up the liquidity of small, 300- to 400-share orders floating around the market without sending signals to anybody that he is doing so."

Kim Bang, CEO of Bloomberg Tradebook, commented, "By aggregating block indication information with continuous market liquidity, clients have greater potential to extract larger [block] trade sizes with price improvement."

Robert Gasser, CEO of executing brokerage and technology provider Nyfix, a Liquidnet competitor, said he thinks Liquidnet is going to have a hard time gaining critical mass. "They certainly do very well in the space they are focused on--the midpoint match," he said. "But now I think they are more aggressively entering our space, and at the end of the day it's going to be tough to do so."

UT grad student wins $50,000 in competition
A University of Texas graduate student has won $50,000 in a collegiate electronic trading competition.

Patrick Christmas, a computer sciences graduate student, won for a computer algorithm he wrote. The competition was hosted by Greenwich, Conn.-based Interactive Brokers Group LLC, which offers electronic brokerage services. Christmas started with an account containing $100,000 in phantom money. Using his algorithm, Christmas earned an additional $120,000 in 10 weeks.

http://austin.bizjournals.com/austin/stories/2006/04/24/daily7.html

ICE Stock Has Fan Base Among Nymex Staffers, Former Execs
By Leah McGrath Goodman

NEW YORK (Dow Jones)---A handful of senior-level staffers and former executives of the New York Mercantile Exchange (NYM.XX) have been sinking hard-earned cash into the stock of rival energy market IntercontinentalExchange Inc. (ICE), people close to the exchanges say.

While Nymex, the world's largest energy exchange, doesn't bar top brass from buying or selling stock of its competitors - so long as staffers comply with insider-trading laws - strong interest in ICE at Nymex is a sign that the rising prominence of the Atlanta-based exchange has become obvious to even its biggest foe.

Indeed, people close to both Nymex and ICE say past and present Nymex executives have placed hefty bets on ICE and its electronic energy market since the company went public Nov. 16. Shares of ICE, which is aggressively targeting Nymex's global commodities business, have climbed as high as $73.59 so far this year after debuting at $26 on the New York Stock Exchange.

"I have been told a number of senior people at Nymex have bought ICE stock," said one person close to Nymex executives who asked not to be named. The person said one Nymex official openly discussed his investment in ICE at a recent industry event, claiming a number of other senior staffers at the exchange also held ICE stock.

Perhaps the most well-known ICE shareholder associated with Nymex is J. Robert Collins, the New York exchange's president from July 2001 to June 2004. Collins, who cut ties with Nymex to start up New York-based energy hedge fund Mother Rock LP, has said he owns several million dollars worth of ICE stock along with Nymex equity of roughly the same value.

Other former Nymex executives privately confirmed they held stock in ICE but, in the interest of maintaining their relationships with Nymex, requested their names be withheld.

Nymex Execs Largely Mum

Not surprisingly, those residing in Nymex's 15th floor executive suite either deny owning ICE shares or decline to discuss the matter, though exchange rules permit them to invest in equities freely.

While conflict-of-interest rules forbid Nymex officers to trade futures or options at their exchange, they are allowed to dabble in equities without disclosing their positions.

For that reason, Nymex was unable to verify whether executives were trading ICE stock on or around April 7, when Nymex and the Chicago Mercantile Exchange (CME) announced a distribution and revenue-sharing agreement. Shares of ICE shed about 25% of their value in the week leading up to the announcement.

Richard Kerschner, Nymex senior vice president of corporate governance and strategic initiatives, said Nymex employees have always been made aware of the illegality of engaging in equities trading based on material nonpublic information, citing U.S. Securities and Exchange Commission rules. At the time of the CME deal, Nymex had no reason to believe its executives were trading stock of any of the exchanges, though it doesn't have a system in place to regularly assess staffers' private trading activities, Kerschner said.

That isn't unusual. For its part, the CME also allows executives to invest in equities - including in competing companies - without surveying them, but bars officials from trading on the basis of nonpublic information, CME spokesman Allan Schoenberg said.

"Typically, we don't consider it a conflict of interest for employees or board members to own a small investment in customers, vendors or competitors, such as less than 2% of a company's outstanding shares," Schoenberg said. In the week leading up to the CME's historic agreement with Nymex, its stock rallied to new highs. The price of a seat on Nymex, which plans to go public later this year, also hit a record.

Hints Of Concern, Dissension

Amid the antler-crashing and courtships among major U.S. futures markets, some industry observers think that any speculation by exchange staffers - especially top power brokers - should be done outside their sphere of influence.

"In this day and age where there's a lot of scrutiny about conflicts of interest and inside information, the cost for executives of trading other exchanges seems a lot greater than the benefit," said Campbell Harvey, professor of finance at Duke University. "It raises a lot of eyebrows, obviously."

Others said such activities could signal a certain degree of executive dissension over corporate strategy at exchanges such as Nymex.

For example, ICE's increasingly popular electronic-trading model has bred tensions at Nymex, where pit traders have been shaken by the loss of business to the screen, said Steve Sanders, managing director of Interactive Brokers, an online brokerage firm in Greenwich, Conn.

That, in turn, may have led some jittery Nymex executives to hedge their bets by investing in ICE, Sanders said.

"Not everybody was in agreement with the Nymex position," he said, referring to the exchange's long-honored commitment to pit trade, where traders shout buy and sell orders. "There was a group that opposed it and was trying to fight it, so I can believe they might have bought ICE stock. If you weren't able to persuade the majority, you'd do the same thing."

The recent about-face by Nymex, however, may mean fewer investments by its own in ICE. Under its agreement with the CME, Nymex plans to expand its electronic footprint by offering key energy futures contracts on Globex, the Chicago exchange's round-the-clock online-trading platform.

Nymex hopes its revised strategy of offering electronic trading of its marquee energy futures contracts alongside pit trading later this quarter will undercut ICE, which plans to launch Nymex look-alike gasoline and heating oil futures contracts Friday.

The Online Finance 40

"Whether tethered or in a hot spot, these leaders are harnessing technology to reach new customers and grow."

Thomas Peterffy moved up in the II ranking from a rank of 30 in 2005 to a rank of 23 in 2006. Thomas Peterffy, chairman of Interactive Brokers, insists on efficiency. Mr. Peterffy acknowledges that markets have become more efficient, but also that they still have far to go. "There’s still more need for liquidity, sophisticated dynamic-order routing, long and short position financing and direct access to some foreign markets," says Peterffy.

Click here to read more.

A New Kind of Exchange
(Liz Moyer)

International Securities Exchange, an upstart electronic trading operation that in its short life has taken the lead away from the Chicago Board Options Exchange in options trading, has unveiled its own fully electronic stock exchange operation, ISE Stock Exchange.

The move comes as long-established floor-based exchange venues like NYSE Group push to add the electronic trading systems that are increasingly in demand from broker-dealers, hedge funds and other investors. It also comes as long-stagnant regional exchanges get fresh infusions of capital from Wall Street firms that are eager to find more choices for executing their trades.

Bear Stearns Cos., JPMorgan Chase, Deutsche Bank, Interactive Brokers Group, Knight Capital Group, Sun Trading and Citadel Derivatives Group have collectively tossed $32 million into ISE's new exchange, which aims to be up and trading by the end of the third quarter. ISE is the majority owner.

Click here to read more.

Interactive Brokers Announces Winner of Trading Olympiad
(Wall Street & Technology Staff)

Interactive Brokers Group named the winner of its first electronic trading Olympiad for colleges. Patrick Christmas, a graduate student at the University of Texas, started with an account of $100,000 in phantom money and earned an additional $120,000 in 10 weeks using computer algorithms. He developed the algorithms using IBG's Interactive Brokers Trader Workstation Application Program Interface.

Christmas was awarded $50,000, and IBG will match that amount as a donation to his college, the University of Texas-Austin.

Click here to read more.

Hiring the Next Generation of Quants
May the Best Trader Win
To entice those students, on Jan. 23, Interactive Brokers (IB) Group launched the first IB Collegiate Trading Olympiad, a contest that will give away $400,000 in prizes to college students who use a live simulator to develop trading models that generate the highest profits. "We're running this competition because we're having trouble getting better people - computer scientists that are interested in coming into the trading industry," says Steve Sanders, managing director for business development at Interactive Brokers Group in Stamford, Conn., which owns Timber Hill, the market maker; and Interactive Brokers, a provider of global electronic broker-dealer services.

The 10-week contest is open to any graduate student with an undergraduate degree in computer science or engineering, as well as undergraduate seniors and graduate students working toward degrees in those majors. "We're not looking for lucky students - we're looking for students who can put together a trading plan," says Sanders.

http://www.wallstreetandtech.com/story/ showArticle.jhtml?articleID=184417510&pgno=2

The Wallendas Hit Wall Street
(Liz Moyer)

Thomas Peterffy, the chairman of Interactive Brokers, wants to make single-stock futures trading as common as stock and options transactions, but he has a pretty high mountain to climb. For the average investor, they're a high-wire act product rivaling the Flying Wallendas.

The main reason is margin; on paper, they look great. The margin requirements for single-stock futures are substantially less than for stock transactions: 20% as opposed to 50%. A trader looking to short an individual stock by borrowing shares could also avoid hefty interest rate charges on the borrowed stock by shorting a stock future, with its lower margin requirements, instead.

Interactive Brokers Invests in OneChicago Stock Futures Exchange
(Wall Street & Technology Staff)

As a result of the transaction, Interactive Brokers joins Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) as major investors in OneChicago. According to the release, Interactive Brokers -- which provides professional traders and investors with direct access to stocks, options, futures bonds and forex on over 50 market centers worldwide -- will combine its key strengths, including broad access to customers, market making expertise and advanced trading technology with those of CBOE, CME and CBOT, to accelerate the market's growing interest in security futures.

Thomas Peterffy, chairman of Interactive Brokers, said in the release that Interactive Brokers' professional customers are realizing that stock futures are the low-cost alternative to margin loans or short rebates for financing their positions. "Interactive Brokers has the lowest margin rates in the industry, but by using stock futures on OneChicago, our customers can do even better," Peterffy stated. He added that the firm will work with its Chicago exchange partners to broaden the list of products, order types and facilities offered by OneChicago.

Click here to read more.

CBOE invites investors to ‘bet the house’
Interactive Brokers announced a significant investment in OneChicago.

Interactive Brokers chairman, Thomas Peterffy, said professional customers "are realizing that stock futures are the low-cost alternative to margin loans or short rebates."

Interactive Brokers Invests in OneChicago
Interactive Brokers Group LLC and OneChicago announced a new partnership that will see Interactive Brokers make an equity investment in the exchange.

Interactive Brokers Makes Equity Investment in OneChicago
(Kate Ryan)

The single stock futures exchange OneChicago LLC today said it received an equity investment from retail brokerage Interactive Brokers LLC.

OneChicago is a joint venture of the Chicago Mercantile Exchange, the Chicago Board of Trade, and the Chicago Board Options Exchange. Terms of the Interactive Brokers investment were not disclosed, but the transaction makes the broker a "major" investor in OneChicago, according to a statement by the exchange. "We are ready to work with our Chicago exchange partners to broaden the list of products, order types and facilities offered by OneChicago," said Interactive Brokers Chairman Thomas Peterffy in a statement.

Barron’s Review of Online Brokers
(Theresa W. Carey)

This year Barron's evaluated trade execution, trading technology, usability, range of offerings, research amenities, portfolio analysis and reports, help and customer access, and cost when ranking the 27 web- and software-based online brokers, although readers made it clear that cost and technology were their two highest priorities for online trading.

In the software-based competition, Interactive Brokers again earned the only 5-star rating for cost and garnered a respectable 4.7 for technology. IB was also noted as having a large number of partnerships with non-US exchanges, and extremely low fees for trading non-US stocks and currencies. IB earned an overall rating of 4.5.

Interactive Brokers Strategy: Turning Technology into a Competitive Advantage
(Ann Burns)

Cutting edge technology plus low commissions plus a single customer account statement for all assets traded all add up to IBG, the multi-billion dollar enterprise that executes 17% of options worldwide and executes over two million equity options contracts daily. Steve Sanders, Managing Director, attributes IBG's continued technological successes to their ability to build and maintain their own technology front to back using in-house development.

"Our technology people have been here for 20 years," explains Sanders "They're not moving around. It's easy for us to change things....We will never be hostage to old technology. If we find a better opportunity to deliver our products at a cheaper price, we're going to go for it."

Click here to read more.

2006 Readers' Choice Awards

Winner (top rank) Forex Brokerages –Interactive Brokers

Winner (top rank) Stock Brokerages –Interactive Brokers

Interactive Brokers is proud to be regarded so highly by the readers of Stocks & Commodities magazine, stated Steve Sanders, Managing Director, Interactive Brokers.

TSE Closed 20 Minutes Early
U.S.-listed shares of Japanese companies tumbled Wednesday, caught in the downdraft created when the Tokyo Stock Exchange was forced to close early after a flood of orders threatened to overwhelm its systems.

“The [Japanese] market has rallied a tremendous 50% in just eight months," said Steve Kelsey, head of Asia Pacific Sales at Interactive Brokers in Hong Kong.

“The market looked extended as you could see turnover was dropping. The market repeatedly tried to break the 16,500 level; however, each rally was made on lower turnover, indicating that bulls were already fully positioned and there was no new buying coming in.”

http://www.marketwatch.com

Interesting Brokers Insight
If you’re not a member of the vibrant Fool Community of discussion boards, you're missing out on a lot.

“You may want to consider a deep discount broker, like Interactive Brokers (IB) or MB Trading. A search on this board for my posts from last spring will give you a detailed summary of these brokers. IB is the easiest to trade with, since you can trade through their Webtrader from any browser… One drawback of IB is a $10/month minimum commission requirement.”

http://www.fool.com

Interactive Brokers Trading Fees as Low as 1/10th of One US Cent a Share
Interactive Brokers LLC (IB), the technology leader in global brokerage services, is introducing a new pricing structure to trade equities where high-volume customers could be charged as little as $0.001 a share, plus all external fees or rebates that will be passed on to customers.

“We are introducing an unbundled price structure for equities trading along with a volume-based sliding scale, which translates into greater discounts for our customers who are active market participants," said IB Managing Director Steve Sanders.

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IB Launches Daily Options Market Statistics, Commentary
Interactive Brokers (IB) has launched a new daily options commentary providing investors and traders with information that reflects the market's expectations of future price movements.

“These statistics are not only important to the options markets but also to the stock and futures markets," said Interactive Brokers Managing Director Steve Sanders. "The key is that derivatives prices have built-in information that reflects the markets' consensus view of the future.”

The IB options commentary includes seven tables of options market statistics, supplemented by a written summary of the day's highlights.

http://www.marketwatch.com

Tokyo, Hong Kong Climb
Share prices in Japan and Hong Kong advanced Wednesday on bullish investor sentiment… Some markets were jittery after China reported two additional deaths linked to avian influenza, bringing the total number of people who have died of the disease on the Chinese mainland to five.

Hong Kong shrugged off the influenza worries. "In Hong Kong, we're getting a surge of liquidity following on the back of the U.S. performance and recent U.S. economic data," said Steve Kelsey, head of Asia Pacific sales at Interactive Brokers.

http://www.wsj.com

NYT, Tribune Calls Busy
Investors are stepping up their bullish positions in the options of newspaper publishers New York Times Co. and Tribune Co amid speculation a successful sale of Knight Ridder could spur more publishing deals, traders said.

“We have seen increased activity in New York Times and Tribune call options. It is likely the result of speculation of further consolidation in the sector after published reports that the Knight Ridder auction process is proceeding well,” said Steve Sosnick, equity risk manager at Timber Hill, a division of Interactive Brokers Group.

http://www.reuters.com

It’s not the Pits
(Liz Moyer)

Interactive Brokers, one of the largest options trading firms, will begin offering clients access to a pit trader at the CME and the Chicago Board Options Exchange later this month, adding the NYMEX later this year.

Some clients want a human trader to handle contracts, especially those in the energy markets, says Steve Sanders, Interactive’s managing director for business development.

Interactive has been resisting the move, Sanders said. "Our hope is still that everything will go electronic and the pits will disappear," he said.

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Calling All Computer Geeks
Interactive Brokers is sponsoring a contest for budding computer programmers, inviting them to come up with a money-making real-time algorithmic trading application.

"We see a dearth of top computer science students interested in financial services," says Steve Sanders, head of IB Group’s business development. “It’s a real struggle to find talented programmers.”

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A Breed Apart
(Suzanne McGee)

How a stubborn, penniless refugee defied Wall Street’s conventional wisdom to become a self-made billionaire –and a driving force behind the automation of global securities trading.

“Thomas is one of those rare people who doesn’t seek fame or wealth for its own sake but focuses on doing what he considers to be right and necessary," says Philip DeFeo, who was CEO of the Pacific Exchange, one of the many stock and options markets that count Interactive Brokers as a member.

“He risked everything to push for more efficient electronic trading networks and helped persuade the financial world these were possible and preferable,”DeFeo says.

See! The Street was Paved with Gold
(Louise Story)

When Thomas Peterffy moved to the United States in the 1960’s, he had little money in his pocket, no knowledge of English and no college degree. But Mr. Peterffy, an immigrant from Hungary, soon found a haven in computers.

Over the next decades, Mr. Peterffy, now 61, built a multibillion-dollar business out of computer-based trading. The recent bidding for part of Refco, the commodities and futures brokerage giant, has thrown a rare spotlight on Mr. Peterffy’s private brokerage and market-making firm, Interactive Brokers, based in Greenwich, Conn.

We felt that if we mixed this with another model, we would lose what is so special about us and what we are so proud of," Mr. Peterffy said.

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Get With the Program
(Theresa W. Carey)

Interactive Brokers, which we rated the best software-based broker this year, didn’t earn that designation for resting on its laurels.

One interesting innovation the firm has pursued is a competition among current college students studying computer science and engineering, in order to promote technological innovation for trading platforms.

“This competition is intended to promote technology, computer science and engineering," says IB Managing Director Steve Sanders. “The students will be writing trading applications that could be used by any of the large firms on the Street.”

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Unlikely Refco Candidate, With Vision
(Jeremy Grant)

When Thomas Peterffy first stepped into the options trading pits at the American Stock Exchange in 1977 the young trader immediately drew attention to himself –and not just because of his Hungarian-accented English.

The former computer programmer was carrying a contraption he had designed to trade options contracts electronically –bypassing the face-to-face trading that floor traders had used for years.

“People were rather suspicious," says Mr Peterffy, now 61 and chairman of Interactive Brokers, which on Wednesday signed a confidentiality agreement with the collapsed broker Refco over its plan to bid for the group’s futures unit.

“But then people realised how much money could be made trading this way –once I got the kinks out of it,”he recalls.

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Peterffy, Refugee Pioneer of Electronic Trading, Bids for Refco
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.

"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.”

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Interactive Brokers Launches $400,000 Trading Olympiad
IBG is sponsoring the Olympiad to highlight the growing need for computer science and engineering students in the financial industry. Students will compete by creating and implementing real-time program trading applications.

“The IBG group has been a pioneer of electronic trading since its origin in 1977,”said Interactive Brokers LLC Managing Director Steve Sanders while announcing the competition.

IBG is the parent of market-making and specialist firm Timber Hill and agency broker Interactive Brokers LLC, which together handle approximately 19 percent of North American and about 16 percent of the world's listed options volume. IBG is the 16th largest U.S. broker-dealer group with about $2 billion in capital.

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