'The market should be much lower,' says billionaire businessman Thomas Peterffy. U.S. soft landing is 'wishful thinking'

By Joseph Adinolfi

Peterffy talks about the surge in options trading, his bitcoin holdings and the future of the U.S. dollar as a reserve currency

Thomas Peterffy, the billionaire founder and chairman of electronic brokerage giant Interactive Brokers Group Inc. (IBKR), thinks the rally in the U.S. stock market has been overdone, and views hopes for a soft landing for the U.S. economy as simply "wishful thinking."

Peterffy has been involved in options since shortly after CBOE Global Markets opened the first exchange for standardized, listed contracts 50 years ago. It has been a corner of financial markets witnessing explosive growth.

He sat down on Tuesday with MarketWatch in New York to talk about stocks, the economic backdrop, his bitcoin holdings, and his puzzlement over why more customers aren't taking advantage of the hefty interest rates paid to Interactive Brokers' clients who opt to keep their money in cash.

The following interview has been edited and condensed for clarity.

MARKETWATCH: The big story in markets this month has been the Dow Jones Industrial Averages' winning streak. What do we make of this? Do you think the rally is broadening out?

PETERFFY: It certainly looks like it, but I'm not a market prognosticator. I have no idea how it's going to continue.

MARKETWATCH: We're getting earnings tonight from Microsoft Corp. (MSFT) and Alphabet Inc. (GOOGL)(GOOGL), Nvidia Corp. (NVDA) set the bar high last time around. What do investors need to hear to keep the AI rally going, and do you think it's sustainable?

PETERFFY: I find it hard to believe that inflation will go down and, at the same time, earnings will continue to rise. I don't see how, with rising employment, inflation will go down. If there's a contraction in employment, then earnings will stop rising.

MARKETWATCH: So, the "soft landing" scenario is...

PETERFFY:...It's wishful thinking, yes.

MARKETWATCH: What do you think we'll hear from Federal Reserve Chairman Jerome Powell on Wednesday? Assuming we get the rate hike we're expecting, is there a chance he might derail the rally?

PETERFFY: He probably will, because he will threaten a subsequent raise.

MARKETWATCH: So, what is the likely path for markets heading into tomorrow?

PETERFFY: I'm not sure about tomorrow, but maybe the day after tomorrow. That's been the pattern after Fed meetings. The following day is usually a nasty one.

MARKETWATCH: You said a few months ago that the market should be much lower.

PETERFFY: Yes, I've been wrong.

MARKETWATCH: Has the market's recent performance done anything to change your mind?

PETERFFY: No, I think the market should be much lower than where it is. But I can't deny that it has risen. But I do think that it's going to go down pretty soon.

MARKETWATCH: April marked 50 years of exchange-listed option trading.

PETERFFY: Right.

MARKETWATCH: It's a market you've been involved in almost since the beginning.

PETERFFY: I've been in the business for 47 years. I missed the first three years.

MARKETWATCH: What were you doing then?

PETERFFY: I watched it from afar. I was working as a computer programmer for a commodities trading firm.

MARKETWATCH: What made you decide to try your luck with options?

PETERFFY: That was because I came up with an options formula. In those days, the Black-Scholes [options valuation model] wasn't out yet, or it was unknown. I came up with a formula -- not really a formula. But I was able to program my computer to predict fair values for options. I thought that would give me an edge in options trading. That's when I took my savings and bought a seat on the American Stock Exchange and became an options trader.

MARKETWATCH: What are some of the biggest changes you've witnesses over the years?

PETERFFY: Certainly the computerization, the shrinking of spreads, the huge increase in volumes. It has seen tremendous growth.

When we started, we had four expirations a year. Then we went to six or seven expirations, depending on which months we were in. Then we went to each month. Then we started to trade weekly options. Then we had weekly options issued each day, which is what we have today.

MARKETWATCH: The past two years have seen option trading by retail investors really pick up. Have volumes continued to climb?

PETERFFY: I don't know what is retail and what is professional, but it looks like they are both climbing, yes, definitely.

MARKETWATCH: Has trading volume on your platform reached any new notable highs recently?

PETERFFY: Oh, definitely, we do about 4 [million] to 5 million contracts a day now.

MARKETWATCH: How does that compare with, say, late 2019?

PETERFFY: I don't remember, but I would venture to guess that it's up about 50% from five years ago. But that's just a guess.

MARKETWATCH: The pace of growth, has that increased?

PETERFFY: Well, you know, it's been gradual growth with some fluctuations over the past 50 years. I remember when the CBOE first opened, I went down to the floor and you would see maybe 20 or 30 trades every hour or so. So, it was very, very, very slow.

MARKETWATCH: How does that compare with today?

PETERFFY: Today's volume couldn't be handled manually. Up until the year 2000, when the ISE exchange started, all options trading was done manually in the United States. Because options trading became computerized first in Europe. And interestingly, in those days, Europe had higher options volume than they do today. Although, it's been starting to pick up lately.

In the 90s, Europe had a busy options market. Then, I don't know what happened, but volumes have dropped a lot.

MARKETWATCH: What are retail options traders trading on Interactive Brokers is it 0DTEs? [Editor's note: a 0DTE is an option contract with 24 hours or less until it expires. Readers can learn more about them here.] Nvidia calls? [Editor's note: a call option is a bet that a stock, exchange-traded fund or index will move higher during the lifespan of the option]? What are some of the more popular strategies?

PETERFFY: The 0DTEs are very popular and most of the options are on the S&P 500 -- the SPDR S&P 500 Trust the ETF (SPY) -- and on the big seven stocks [Editor's note: The "big seven" stocks include Microsoft, Alphabet Inc., Tesla Inc. (TSLA), Nvidia, Amazon.com Inc. (AMZN), Apple Inc. (AAPL) and Meta Platforms Inc. (META)] Tesla specifically is a very, very popular options vehicle. It often trades more than the S&P 500. Lately also Nvidia, since the stock has gone crazy.

MARKETWATCH: How has options trading changed post-pandemic? Do you think it's changing how the market functions?

PETERFFY: Well, all I can tell you is stock volumes have been decreasing, so what happened is that in most cases -- at least from our customers' perspective -- they were very, very long these big seven stocks. As these stocks have risen, investors have huge unrealized profits in them. They are not about to take those profits and pay taxes on them, so they have begun options overwrite programs where they write up market -- or slightly out of the money -- calls and just keep rolling them, and rolling them, and rolling them, and never really delivering the stock. [Editor's note: Investors who hold a large position in a stock can sell call options against their stock holdings to generate extra income.]

MARKETWATCH: Interactive Brokers is expanding the number of stocks and ETFs that can be traded 24/5. Do you think it's inevitable that equity markets will move toward 24/7 trading?

PETERFFY: I think it will, because there is more and more interest in the Asian and European countries. Most of their attention is, of course, also focused on the big seven stocks because there is so much news about them all the time.

Since many of them are sleeping when our markets are open, they are happy to avail themselves of trading opportunities in non-US market hours.

MARKETWATCH: Interactive Brokers pays out a pretty hefty interest rate on customer deposits, especially when compared with many major banks. You said a few months ago that you have more than $100 billion in cash in client funds. Have you seen more customer funds flow following the March regional bank turmoil?

PETERFFY: Surprisingly, it has not. It is still the same. Even though we keep telling everybody that we're paying 4.58%, maybe going to 4.83% tomorrow [if the Fed hikes rates as expected], but people have tremendous inertia. They are happy to have their money at other brokers and receive no interest. They can't be enticed to move the money. Even though if you have $100,000 of cash, it's about $5,000 a year you forgo. It's not peanuts.

MARKETWATCH: You've expressed some skepticism about bitcoin in the past. How do you feel about this year's rebound?

PETERFFY: It's guarded skepticism because I've always said that I own a fairly large amount of bitcoin, even though I believe it could become worthless. But it's also possible that it will become very valuable. I can't read minds. I would have thought if you offered people nearly 5% interest on their money, they would bring the money over, yet they don't. That is a much clearer situation than crypto where you have no idea what's going to happen because it has no fundamental value.

But, of course, all money is basically valued based on the idea of how many people accept it in the form of payment. That includes the U.S. dollar, too.

MARKETWATCH: Do you have a view on the U.S. dollar . Could it go lower?

PETERFFY: Of course it could. It seems to be, maybe, slowly losing its prominence as the world's currency. If the euro and the Chinese renminbi become the currencies of choice in some international contracts, then that certainly has an impact on the U.S. dollar and its value, because there are a huge amount of U.S. dollars being held by foreigners in paper form.

MARKETWATCH: What about China? Do you have any thoughts on the Chinese economy?

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07-26-23 0939ET

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