Interactive brokers traders marketplace
The original organization was first created as a market maker in under the name T. It became the first to use fair value pricing sheets on an exchange trading floor in , and the first to use handheld computers for trading, in In , Peterffy also created the first fully automated algorithmic trading system, to automatically create and submit orders to a market.
Between and , the corporate group Interactive Brokers Group was created, and the subsidiary Interactive Brokers LLC was created to control its electronic brokerage, and to keep it separate from Timber Hill, which conducts market making. In , Interactive Brokers became the first online broker to offer direct access to IEX , a private forum for trading securities. The following year, he formed his first company, named T. At the time, trading used an open outcry system; Peterffy developed algorithms to determine the best prices for options and used those on the trading floor,  and thus the firm became the first to use daily printed fair value pricing sheets.
In , the company expanded to employ four traders, three of whom were AMEX members. In , Peterffy renamed T. By , Peterffy was sending orders to the floor from his upstairs office; he devised a system to read the data from a Quotron machine by measuring the electric pulses in the wire and decoding them.
The data would be then sent through Peterffy's trading algorithms, and then Peterffy would call down the trades. At the time, the AMEX didn't permit computers on the trading floor. Because of this, Peterffy had an assistant deliver market information from his office in the World Trade Center. In , Timber Hill created the first handheld computers used for trading. As Peterffy explained in a interview, the battery-powered units had touch screens for the user to input a stock price and it would produce the recommended option prices,   and it also tracked positions and continually repriced options on stocks.
When he made the device smaller, the committee stated that no analytic devices were allowed to be used on the exchange floor. Effectively blocked from using the CBOE, he sought to use his devices in other exchanges. Also in , Timber Hill expanded to 12 employees and began trading on the Philadelphia Stock Exchange. In , Timber Hill began coding a computerized stock index futures and options trading system and, in February , Timber Hill's system and network was brought online.
The system was designed to centrally price and manage risk on a portfolio of equity derivatives traded in multiple locations around the country. However, the stock exchange only allowed it to be used at trading booths several yards away from where transactions were executed. Peterffy responded by designing a code system for his traders to read colored bars emitted in patterns from the video displays of computers in the booths.
This caused the exchange and other members to be suspicious of insider trading , which convinced Timber Hill to distribute instructions throughout the exchange, describing how to read the displays. Eventually computers were allowed on the trading floor. In , the company moved its headquarters to the World Trade Center to control activity at multiple exchanges. Peterffy again hired workers to sprint from his offices to the exchanges with updated handheld devices, which he later superseded with phone lines carrying data to computers at the exchanges.
Peterffy later built miniature radio transmitters into the handhelds and the exchange computers to allow data to automatically flow to them. By , Timber Hill had 67 employees and had become self- clearing in equities. Because of this, Peterffy pledged that Timber Hill would make tight markets in the product for a year if the exchange would allow the traders to use handheld computers on the trading floor. At that time, Timber Hill had employees.
While Peterffy was trading on the Nasdaq in ,  he created the first fully automated algorithmic trading system. It consisted of an IBM computer that would pull data from a Nasdaq terminal connected to it and carry out trades on a fully automated basis. The machine, for which Peterffy wrote the software, worked faster than a trader could. Peterffy and his team designed a system with a camera to read the terminal, a computer to decode the visual data, and mechanical fingers to type in the trade orders, which was then accepted by the Nasdaq.
In , Timber Hill France S. By , Timber Hill had employees. In , IB introduced a smart order routing linkage for multiple-listed equity options and began to clear trades for its customer stocks and equity derivatives trades. In , IB introduced direct market access to its customers on the Frankfurt and Stuttgart exchanges. In the same year, IB upgraded its account management system and Trader Workstation, adding real-time charts, scanners, fundamental analytics, and tools BookTrader and OptionTrader to the platform.
In , the IB Options Intelligence Report was launched to report on unusual concentrations of trading interests and changing levels of uncertainty in the option markets. In , Interactive Brokers started offering penny-priced options. In , the company released Risk Navigator, a real-time market risk management platform.
Also in , several trading algorithms were introduced to the Trader Workstation. Among these is the Accumulate-Distribute Algo, which allows traders to divide large orders into small non-uniform increments and release them at random intervals over time to achieve better prices for large volume orders. Interactive Brokers also became in the largest online U.
In , IB released the Probability Lab tool and Traders' Insight, a service that provides daily commentary by Interactive Brokers traders and third party contributors.
An IB FYI also can act to automatically suspend a customer's orders before the announcement of major economic events that influence the market.
Rapidly expanding computer processing power at lower and lower prices has meant that businesses of all sorts have been able to cut their costs and increase their profitability by widescale deployment of computer hardware and software. Efficiency and cost improvements typically are realized by analyzing the functions traditionally performed by various workers in the enterprise and automating any function that can be more quickly and reliably performed by a computer.
This obviously causes some dislocation for the affected workers, but viewing it positively, the real result should be that human capital is freed to engage in other more productive endeavors such as creating new projects or businesses. The process of automation, productivity increase and business reinvention has been the driving force behind the tremendous, low-inflation growth of the American economy over the past decades.
Indeed, it has been the driving force behind the growth of the world economy over the past three millennia. There is an ongoing mystery, however, regarding the securities and futures industry. Namely, while many aspects of the business have been automated over the past twenty or thirty years, the central function of handling and executing orders is still surprisingly manual. The nation's predominant equity markets and four of its five existing option markets still have largely human-intermediated order handling and matching mechanisms.
This situation is particularly remarkable in that handling and executing securities and futures orders is, at its core, a recordkeeping process that is almost ideally suited to be done by computers, which are cheaper, faster, less prone to mistakes, and much less open to fraud than we humans are.
Having said all this, there are several very good reasons why traditional exchanges and broker-dealers have resisted complete automation and why we may now be at something of a standstill in the evolution of our market structure. This paper attempts to outline some of those reasons and to suggest a few possible approaches.
In short, the problem appears to be that a variety of well-intentioned, sometimes necessary, rule initiatives over recent years, including enactment of customer priority rules, trade-through rules, limit order display and handling rules and other rules designed to protect customers, may now be working in a roundabout way to achieve the opposite of their intended effect.
Because of decimalization, if these rules and others were followed to the minutest detail, it would be dramatically more difficult, or even impossible, for dealers and exchange professionals to trade profitably. Designated liquidity providers therefore have had to rely on their inherent time and place advantage in the manual marketplace - specifically, that they can see orders before others can see them and can take their time sometimes up to 90 seconds to decide whether to interact with these orders or not -- in order to reap a reward for the services they provide.
Having this discretion even for a few seconds, creating a "gradient of firmness" of quotes, is enough to generate substantial profits. But complete automation of order handling and execution, by eliminating latency and creating a perfectly clear time sequence of trading events, would eliminate this advantage. Even if it ultimately would be in the public interest, exchanges and their constituents understandably are reluctant to hand over large satchels of money for technology that may reduce profits and eliminate certain market participants altogether.
Since the established dealer and exchange structures may have little to gain from more complete automation of the order handling and execution process under the current rules, we are all stuck unless two things happen the first a carrot and the other a stick. First, we must think of innovative ways to restore the economic incentives for existing exchanges and their professional traders to provide liquidity to the marketplace for example, by eliminating or reversing customer priority rules, which create only an illusion of customer benefit; by eliminating ITS and replacing exchange-level trade-through rules with augmented best execution duties; or by enhancing liquidity payments and specialist participation rights in electronic trades.
Second, we must not impede the development of new electronic markets that will force existing players to automate in order to compete with the speed, certainty and cheaper trade processing costs that these new markets offer. An Ideal Market Structure The Commission's last comprehensive look at market structure was its concept release calling for comments on market fragmentation, issued in February "Market Fragmentation Release".
While the goals of the CLOB proposal were laudable - i. It would have reduced or eliminated the vitality of competing market centers and it would have eliminated incentives for developing new services and innovative products.
It also would have created a capacity choke point and a single point of failure in the national market system. On the other hand, a number of commenters and perhaps some members of the Commission staff seemed to agree that many of the benefits that might have been afforded by a central limit order book could be duplicated and enhanced by expanding and improving on current market structures.
Under this alternate scenario, there would continue to be multiple liquidity centers competing on price, but these liquidity centers would be linked not via a CLOB mechanism but by "smart" systems operated by brokers and market centers that would route each order to the market posting the best electronically accessible price.
In the two years that have elapsed since the issuance of the Market Fragmentation Release, it has become even clearer that this simple approach is workable and would provide great benefit to the national market system. As these rules would be completely codified in software, there would be no room for subjective interpretation. Broker-dealers, pursuant to their fiduciary duty of best execution, would route each of their orders for instant, automatic execution based on a composite view of the order books of the liquidity centers.
This market structure would put all market participants on a level playing field, it would assure transparency and price competition, and it would provide best execution of customer orders. Automated routing and execution of orders would not only increase fairness and transparency, it would also dramatically lower costs of execution, because of the inherent efficiency and cost advantage of computerized processes.
Of course, the relatively high brokerage and execution costs hidden and not hidden arising under the current system are passed on to customers and other users of the capital markets. If the market structure just outlined is technologically feasible and would offer significant benefits to the public, why hasn't it happened? In the two years since the issuance of the Market Fragmentation Release, there has been too little movement toward further opening and automation of the nation's securities markets - the increased prominence of the ISE for options trading being an exception.
This illustrates one of the central points of this discussion: The Economic and Regulatory Disincentives to Automation The reason that conventional brokers and exchanges have not embraced the model of open, fully electronic liquidity centers linked by automated order routing systems is that they have no economic incentive to do so.
Unlike almost any other business one can think of, under the rules as they are now, dealers, exchanges and their constituents have good reason to fear that they will make less money and become less profitable if they automate. Because of the ill-defined time sequences and communication latencies inherent in manual order execution, professionals who have been granted market maker privileges in exchange for the associated burdens can see orders before others can see them and can take seconds or minutes to decide whether to interact with these orders or other orders that are available.
Although there are rules that describe what can be done and when, given the known sequence of events in time, nonetheless the market and the regulators seem to acknowledge that within some time window the precise timing of events may be interpreted by the subjective experience of the participants in place. Indeed this imprecision and the resulting informational advantages to certain inside market participants have repeatedly been woven into the very fabric of the market structure, and manual mechanisms like ITS, the planned option market linkage, 30 or 90 second trade reporting rules and the like create relative oceans of time in which events, prices and transactions are subject to discretion.
On the other hand, the more computerized these processes become, the less room there is for subjective interpretation, and computers following the rules strictly as they are will eliminate much of the profits that are generated by the current "give" in the system. Thus, asking the exchanges and their constituents fully to automate the order handling and execution process amounts to asking them to spend money in order to lose money.
The situation for the dealers and the exchanges is made worse by the fact that rules and structures have been agreed by or imposed on them over the years that, now, in a decimalized environment, make it hard for them to profit other than through the informational and time and place advantages created by an inefficient trade matching mechanism. Customer priority rules, trade-through rules, linkage rules, order handling and display rules, firm quote rules and other market rules are all examples of this.
Some of these rules are essential and benefit customers but some of them have simply forced market makers to earn justified trading profits by less transparent means. Customer priority rules on option exchanges are a good example of this phenomenon. Under these rules customer orders are always given priority over professional orders at the same price. The customer benefit is illusory however, because in order to compensate for the structural disadvantage suffered by members due to the customer priority policy, option orders that are handled on the floor are subject to, shall we say, somewhat uneven treatment.
Moreover, to compensate for the customer priority rules, option exchanges have passed a host of other, often vague rules that make their markets less fair, less transparent, and less automated for customers. These include rules prohibiting customers from creating and transmitting orders electronically requiring artificial manual delays in order processing , rules kicking customer orders out of automatic execution systems and to the floor for manual handling in various ill-defined circumstances, rules purporting to require customers to express all of their trading interest in a single order rather than working a trade through multiple small orders leading to more manual processing of the resulting larger size orders , rules prohibiting customers from sending in orders on the same side of the market in the same option class faster than 15 seconds apart, rules preventing customers from sending two-sided orders, and on and on.
Most or all of these rules have been justified on the grounds that they are necessary in light of the fact that customers are given trading priority over professionals.