Tom Sosnoff: A Q&A with the $600 million man behind Thinkorswim

In an era when so many things have gone so wrong on Wall Street, the story of options trader Tom Sosnoff stands out as one thing that's gone right. Sosnoff is co-founder of online brokerage firm Thinkorswim, the top-rated online broker in Barron's and one that's amassed some $3.6 billion in client assets from more than 70,000 trading accounts over the course of a decade.

Sosnoff, who spent 10 years as an options-market maker at the Chicago Mercantile Exchange, created Thinkorswim in 1999 and sold it this year to TD Ameritrade (AMTD)for more than $600 million. Now senior VP of the TD's Trader Group, Sosnoff took a break from trading to chat with DailyFinance about the stock market, investing trends, and what it takes to build a successful company.
DailyFinance: Ten years after its launch, Thinkorswim continues to be profitable. When you were growing the brokerage, how did you focus on this long-term strategy rather than short-term cash flow?
It's all about sacrificing your own short-term payout and focusing on long-term success. Our company was profitable from day one. We never had a losing month, and we always made more the following month, so we continually put money back into the business. In fact, when we raised private-equity capital, we never spent a penny of it.

How do you attribute your strong growth?
We were fiscally responsible, and we built a great model and the best technology in the space. And we were careful not to outgrow our coverage, never spending more than we had.

Where do opportunities lie for financial start-up entrepreneurs?
Nothing really ever changes -- hard work, creative thinking, and very strong technology. Smarts are commoditized -- commitment to a domain skill are not.

What emerging investment trends do you see going forward?
Long-term investing is wounded and may not recover. Everything is going self-directed; the short-term perspective will become the norm. We will see a lot more people taking control of their finances, self-directed investors: a shift from traditional money-management, products, and old-school brokerage firms to online brokers and great technology. The best technology will rule.

You're an active options trader and an instructor for the Thinkorswim educational program. Many traders are scared of the risks and unaware of the rewards. What do you tell someone getting started in options?
Don't be scared of the product, because ultimately, it's the product that will find you the most opportunities to make money. Keep your position small, don't be afraid to diversify your positions, and don't touch stocks that are thinly traded.

What's the secret to long-term success in options trading?
Remember that you are only as good as your last trade -- and never read your own press clippings. Stay humble or the market will be the one humbling you.

What's the key to a high-ticket acquisition like TD's acquisition of Thinkorswim?
Our case was unique, because our deal was designed to bring better technology and intellectual property, with respect to the online brokerage business. This growth deal brought industry know-how and strong tech platforms.

So TD Ameritrade decided it was easier to buy you out than to try to build a competitor. What's your strategy in this market environment?
Sell it. Given the scope and velocity of the U.S. stock-market rally over the past several months, I believe that the risk/reward favors the downside here. Short out-of-the-money calls, short OTM call spreads, and similar short premium strategies afford the best risk/reward opportunity. I think the market is headed lower for the short-term, and then higher next year. I think that the market is very, very rich at these levels. The only trend I'm bullish on is the U.S. dollar.

What are your top picks right now? While I prefer the short side, If I had to pick two or three longs, I would say U.S. Natural Gas Fund ETF (UNG), Financial Bear 3XNEW (FAZ), and Southwest Airlines Co. (LUV). I don't like the emerging markets, the NASDAQ, or the Russell, and I don't like oil and gold either.

So now that you've sold, what's next?
I'm happy in the current role, and I have some wonderful opportunities with this bigger playground. I plan to do special things for TD Ameritrade, all technology-driven -- no hints yet, but we're about to roll out some of the best software I've ever worked on.

What do you enjoy before and after market hours?
Answering emails, eating, and trying to do nothing.

Chicago's a great food town. Got any favorite restaurants?
Superdawg, La Pasadita, and Wishbone.
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