Larry Arnowitz is the CEO of Arnowitz Financial Services, an introducing broker. He has been in that role since May 2008. Before starting Arnowitz Financial Services, Arnowitz was the CEO of GNI Inc. from July 1988 – May 2003. He spoke with Sarah Rudolph about what it was like to be in the forefront of electronic trading, the pleasures of building and running one’s own business, and the next chapter in life.
Q: How did you get your start in the business?
A: I started out as a runner for Refco in 1981 on the floor of the Merc (Chicago Mercantile Exchange) in Treasury bills. I stayed with Refco for a couple of years on the floor and then went to Paine Webber on the phones for two years and then I was a local in the bond pit for a year. That was not the best part of my career. It was a lot tougher than I thought to stand in the pit and make money. That also was kind of silly because I’d been at the Merc and I came over to the bonds where I didn’t know anybody. This was pre-electronic anything.
After a year doing that I moved to London and got a job with GNI, who hired me in 1987 as an upstairs phone clerk to start an American desk. We established relationships in Chicago, and I built up a business of bonds and Euros and U.S. products for Europeans. I got to travel a lot, which was a nice benefit. Europe was probably five years behind us as far as using futures on interest rates. So we traveled to all the central banks and talked about Eurodollars and yield curves and spreads and how you could trade on a conservative spread yield. It was a great opportunity to educate and for me to learn about European markets. I was there for three years and then I moved back to Chicago to set up GNI in Chicago. Man bought us out in 2002 and we became a full clearing member of the Merc and the Board [the Chicago Board of Trade]. And we kept building the business.
Q: It was mostly interest rates?
A: The floor operations were all interest rates. We got very much into technology and electronic trading, because in that case, London was ahead of us. They had electronic trading first and we in the U.S. were fighting it. All the guys [running a shop] like me, but in their 60s, were avoiding technology in America because if it ain’t broke why fix it? They were making a lot of money. But I saw it as an opportunity to extend our market share. You could see from what was going on in London it was obvious what was going to take place – it was in the stock market, it was in the London futures market, the only place it wasn’t was in the Chicago markets. Because we were doing it in London, I knew what equipment to get and how to make changes, and we negotiated global contracts with Patsystems and Trading Technologies, etc. So when Man bought us out in ’02, I stayed six months because you don’t need two CEOs.
Then I went to work with an IB called TJM for about five years. I didn’t like that at all. I had been very lucky at GNI, because how often does someone say, “Okay Larry, here’s $24 million worth of capital, go run a business and make money and keep a chunk of it for your bonus pool.” I had to report back once a month, but otherwise they left me alone to run the business. Twenty percent of the profits we made in Chicago I got to divide amongst me and my staff as a bonus. To go from that, where it was exciting to come to work every day, and then to go to work for somebody else who isn’t very structured and changes their mind a lot and you can’t make any decisions because you’re getting micromanaged – I had a hard time with that. So I went into trading on my own. And I’ve had my own office for a couple of years now.
Q: Arnowitz Financial Services?
A: Yes. Naively, I figured I’d just set up an IB, no employees and no expenses. Even though it was real basic, it took the NFA six months to set it up, and then I was immediately audited, even though I had almost no business. So being an IB was much more of a hassle than I thought it would be. Hopefully I’ll come across a piece of business here or there. I’m trying to do this hurricane insurance with the Chicago Climate Exchange, and in order to operate I needed to be an IB.
Q: Why do you believe the hurricane futures will be a successful product?
A: The CME has a similar product as well, but there’s a slight difference in the delivery. And to be honest with you, I’m not sure which is better yet. I understand the differences. I think it’s better depending on who you are. One contract pays you a set amount once it’s determined, but it might not be determined for six months. The other contract is a billion dollar contract delivery once the hurricane goes over a certain threshold: after ten billion dollars the contract kicks in, let’s say. As soon as it goes over ten billion, that contract kicks in and you get paid instantly, you don’t have to wait six months. Depending on how soon you need the money, you might have to take a little bit less.
I think the contract will work because the reinsurance markets are really hurting right now. Capital is king, but nobody has capital. Two years ago the state of Florida paid Warren Buffett, the only person who would insure them for hurricane risk. They paid a 12 percent premium. That year they paid the premium and they didn’t use any of it. So they paid tens of millions of dollars to Buffett for nothing. And the state was broke like every other state. Now, actuarially, the real risk of that event occurring in the state of Florida was somewhere between 1 and 1 ½ percent. So Buffett got a huge spread over reality. I’ve got to think there are people out there who would be willing to sell five or six percent and be happy with a four percent spread over reality instead of the 11 percent Warren got. So I think there’s room for market makers.
The more the reinsurance companies can’t get this reinsurance, the more they have to turn to the capital markets. There is so much more depth in the capital markets, you can get a lot more of this coverage. I’ve talked to some hedge fund guys and I’m not a rocket scientist, but they are, and I think there’s got to be relationships between oil and hurricanes, orange juice and hurricanes – I’m sure there are lock-step relationships.
It’s fun – I’m learning new stuff, meeting new people.
Q: Your bio mentions that you sometimes do expert witness testimony. What is that like?
A: Two summers ago I got a trip to London for a British law firm where there was a question about when an FCM should have discovered a fraud was going on. Expert witness work is hard to get but it’s really interesting. I would love to do more of it.
Q: The industry has changed tremendously in a short time, with the move to electronic trading. You were sort of on the edge of that because you started in Europe. Are you happy with the changes in the industry? Did you find it frustrating trying to fight the bias against electronic trading?
A: Well yes, because I don’t think it’s that electronic trading was necessarily better or worse, it was just inevitable. There’s a lot to be said about the camaraderie on the floor and things like that, but if the market is supposed to be the central place to meet and trade, certainly the computer gives a lot more people access.
Part of the fight against electronic trading was just that people don’t like change. I think it’s a good change, it has created more jobs for people – I mean, look at the CME stock. It’s a much more efficient way to run a business.
That’s why I wasn’t arguing with these guys about what should be done. It was just going to happen. The more they stood in the way the happier I was because I could go to New York and get clients and say, “Well, I know you’ve been clearing at Dean Witter for 14 years, but don’t you understand that instead of calling your guy and telling him to buy 1,000 front month Eurodollars and doing it for 50 cents a contract you can do it for free by pushing this button, and it goes right through my servers. So it was a big plus to embrace it first, and it helped me build my business.
I think people in the business back then would tell you we had the best technology on the street at that time. And that’s all we tried to sell. We went to the phones, we went to the algorithmic traders – nobody knew how to talk to an algorithmic trader back then and we were talking to these guys and they were all over it. So it was something different every day, it was a new story to tell. A new reason to go knock on doors and have something different to say. To me that’s a big part of the business. That’s why I said, I was really lucky at GNI because I got to build a business on my own from nothing with advice and money from other people. And London never argued with me about spending the money, because they could see [it was necessary to develop the technology.]
Q: Do you see any trends starting right now in the industry that people may not be aware of?
A: I think people are paying a lot more attention to retail. I think people finally figured out that the stock market has it right, that there are doctors in Iowa who want to trade, and if you look at the advertising that Ameritrade or Schwab or those guys do, they say you can research online and backtest and backtrade in the lab. Well, years ago tech companies said you can use our systems to backtest, and we’ll help you build a system. Now, that’s coming for free to the retail traders. So if you’re some guy and you have some idea about how to trade, you can put it into your system on Schwab and they’ll trade it for you. And I think that’s where we’re going – more toward smarter retail.
And now hedge funds and stuff and with all this regulation, who knows?
Q: Do you have any hobbies?
A: Well, I do some charity work, I play a lot of golf, deal with my kids. I have two kids. One is a freshman in college and one is a senior in high school. So my life changes soon. Because there will be no kids in the house and it will all be different.
Q: Good or bad? Or a little of both?
A: I think it will be really good. Kids change your life in a ton of great ways, that’s for sure. But a lot of freedom is taken away when you have kids. It’s a great trade, no question about it; I’d do it again in a second. But it will be interesting now, after 20 years, my wife and I will be able to eat dinner, the two of us, when we want, do what we want, it’s a lot more openness. Hopefully we’ll be able to become even better friends. I think it will be really fun.