About 25 years ago, some dimwit half my age got picked up to become a market maker for Timber Hill, a US prop trader aggressively expanding in Europe. Different times people, different times. The prop trading HFT's of today were just moving beyond single digits in employees, still quickly calculating bids and offers based on a dot matrix print they made before opening bell. Timber Hill though was different and I was beyond excitement to have become a part of it.
As a trading firm, Timber Hill was not nanoseconds ahead of the competition, they were years ahead. Their pricing models were more advanced, incorporating and off-setting global positions following algorithms that we as traders were not aware of. This was enabled not by using the latest state of the art technology available but by concocting it out of the technology boom that was just getting started. It was early nineties and they were using tablets and wireless data. Timber Hill brought guns to what still was a fist fight, became the blueprint for HFT and set the technological arms race in motion.
As traders we were insignificant cogs in a well-tuned machine, monkeys if you will. The pay was in line with that and mostly ditto for job recognition. Yet when I think about the most fun I've had being regularly employed, it was then. In large that was due to the camaraderie between the colleagues. A real team that always had each others back. We were the odd ones out amongst the flashy market makers where some of them were trying extremely hard to act, look and smell like the Hollywood caricatures of a Wall Street trader movie. But it was also about being in complete awe of the people at the top of Timber Hill. True innovators that, to this day, are still some of the sharpest minds I ever worked for.
And now, they are calling it quits. Did something go wrong? On the contrary. Everything went to plan and Timber Hill moved on way before the competition was even close to catching on. And there are lessons to be learned here.
By the mid nineties, Timber Hill was already setting its sights on a new trajectory. It started Interactive Brokers, an Internet based brokerage built out of their technology way before the Internet caught on mainstream. IB is hugely successful, handling over USD 12 billion in clients assets, putting founder Thomas Peterffy in the comfy spot of being no. 248 in the world’s list of richest people and 76 for the US. All made with his own hands, unlike some other self proclaimed billionaire business men.
The lessons to be learned. Business models come and go. Every business and business model has its life cycle. That Timber Hill would some day quit has been a long time coming. Check out this 2010 story from Amsterdam Trader (RIP Jack). Sure it was trailing behind the other firms lately, but it served its purpose and I'm sure the reason it was still operating the last years was more based on sentiment (it's hard to kill your baby) and and loyalty to staff than dollars and sense. It also fits with the departure of Teza from prop trading and a refocus of KCG. It can be argued that the business model of prop trading has reached its peak and the prop trading giants of today are, or should be, looking for other pastures to graze on. When you're dependent on their liquidity (looking at you exchanges) you should tap into that and adapt your models. Major changes are around the corner. A true innovator builds a new business line before the successful one fizzles out.
Circling back to Interactive Brokers, the same can be argued for their business model. If the Googles and Facebooks of this world decide to combine their predictive data models with their distribution power and step into the brokerage or direct exchange game, it could blow the IB's or exchanges of this world out of the water.
Knowing Thomas Peterffy a tiny little bit, I safely assume he has seen that one coming years ago and is already making his next move.