Two Sigma to Buy Interactive Brokers' Options Trading Unit

Updated on
  • Purchase fills out options trading business for Two Sigma
  • Timber Hill, founded in 1982, was electronic trading pioneer

Two Sigma Securities agreed to buy Interactive Brokers Group Inc.’s options market-making business, acquiring a pioneer of electronic trading to forge into derivatives trading.

Terms of the deal for Timber Hill weren’t disclosed in a Tuesday statement announcing the transaction.

Interactive Brokers Chairman and Chief Executive Officer Thomas Peterffy founded Timber Hill in 1982, helping propel him to billionaire status. The business was once the world’s largest options market maker, though it’s ceded that title in the U.S. to the likes of Citadel Securities and Susquehanna International Group.

Though Timber Hill has shrunk, the deal helps finally get Two Sigma Securities into options trading after it’s spent several years assembling the pieces, including the acquisition of technology from KCG Holdings Inc.’s options business in 2016. It will complete its first options trade next week, CEO Simon Yates said in an interview. The affiliate of the $46 billion quantitative hedge fund Two Sigma Investments is entering the business after other firms including UBS Group AG left.

“There’s room for at least four or five large-scale market makers, and I think over time we can be one of those,” said Yates, who was hired from Citigroup Inc. in 2014 to run the securities business. “This is definitely not a top-of-the-market deal.”

Industry Lull

The purchase comes amid muted volatility in stocks, which tends to diminish options trading volume. Market makers, which are firms that facilitate others’ trading by buying from sellers and selling to buyers, are also struggling with the high cost of technology and the expense of being connected with the fragmented U.S. options market, which has 15 exchanges. The options industry is dominated by a handful of large trading firms, including Citadel Securities, Susquehanna and Wolverine Trading.

While the options industry is in a tough spot right now with low volatility, odds are that isn’t going to last, Yates said. It’s hard for volatility to stay as low as it is for a long time, he said. The Chicago Board Options Exchange Volatility Index, commonly known as the VIX, closed at its lowest level since 1993 on Monday.

“They probably saw some value there,” said Tom Lehrkinder, a senior analyst at Tabb Group. “I think that’s actually bullish for the options market.”

Two Sigma Securities, which started in 2009, is already a major player as a market maker in U.S. stocks, handling more than 300 million shares a day, according to the company’s website. Two Sigma is one of the biggest quant funds. The New York-based firm was founded in 2001 by David Siegel, a former chief technology officer at Tudor Investment Corp., and John Overdeck from D.E. Shaw & Co.

Yates said the company plans to hire 20 to 30 Timber Hill employees. Two Sigma Securities is acquiring Timber Hill’s market-making software and some specialist obligations, but is not technically acquiring the whole business because of legal complexities, Yates said. Nonetheless, Two Sigma Securities is effectively bringing the whole operation aboard, he added. Timber Hill’s system will be integrated over the coming months and the deal is expected to close in September.

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