Michael Lewis opens his latest literary blockbuster, Flash Boys, with a tale of a man who dug a $US300 million tunnel through a mountain range in the US and laid a high-speed, fibre-optic cable to Wall Street's stock exchanges -- which he then charged the banks millions of dollars to access.
The story illustrates the pricelessness of speed in today’s trading rooms, and while Flash Boys is about the stock market and the rise of high-frequency traders, in the land of currency exchange the mastery of the speed paradigm has propelled Pepperstone’s Owen Kerr into this year’s BRW Rich 200 List.
At just 30 years of age, Kerr is now worth a cool $250 million (co-founder Joe Davenport, 31, hails from Britain so could not be included in the list) and while you have probably heard a lot about other Australian tech entrepreneurs on the list -- such as Atlassian’s Mark Cannon-Brookes and Scott Farquhar, Freelancer’s Matt Barrie, retailer Ruslan Kogan or Seek’s Andrew Bassat -- Kerr and Davenport have deliberately maintained a low profile.
Pepperstone’s rise as a digital disruptor is about as cookie-cutter a story you can get: two young tech whizzes invent a product that does something better, faster, cheaper than the incumbents -- and then they watch the dollars flow in.
“Everyone around the world used to get ripped off horribly,” Kerr told Business Spectator. “The gap between the buy and sell prices was huge and the guys taking all the fat were the big investment banks in the middle. They were making obscene profits.”
So when Kerr and Davenport met back in 2006, they decided to build a solution -- literally. The pair constructed their own hardware, software and fibre-optic cable network, co-located with 14 of the world’s biggest banks in Equinix’s NY4 data centre -- a global hub for financial trading, situated 11 miles from Wall Street in New York.
The set-up allows them to get trading information to and from their “boxes” as fast as possible, reducing the latency in transmitting trade orders so their customers can get the best price. (A fibre-optic network can beat a copper network by milliseconds, and milliseconds matter.)
With further efficiencies gained from eliminating manual back-of-house settlement processes, Pepperstone has been able to undercut its competitors by reducing the average commission rate on a trade from $50 to a mere $7.
Pepperstone's global Infrastructure footprint serves clients globally with low latency.
For all the financial know-how and technological prowess, however, Kerr is about as far from a tech-savvy Wall Street broker as you can imagine.
“I’m a farmer, I love getting down to the dairy farm and hanging out with the cows -- that’s my downtime,” he laughs. “I love getting down there in the mud and open skies, and just being in the great outdoors.”
Kerr grew up “in the middle of nowhere” in Gippsland, Victoria, and his laid-back, country-boy demeanour remains well and truly intact: bright-eyed, fair-haired and chipper, Kerr speaks with a relaxed inflection and wears neither a suit nor the stereotypically sloppy attire of serious tech-heads -- opting instead for the neat casual of shirt, jeans and a navy winter coat.
Davenport, meanwhile, has a background in finance but Kerr describes him as a “mad surfer” who lives in sleepy Torquay on the Great Ocean Road.
But perhaps Kerr’s upbringing isn’t incongruous to the life of a self-made millionaire after all. He describes waking up at the crack of dawn on the farm as “hard work, but it’s good”, and his ability to channel that fervour and fortitude elsewhere has clearly paid off.
There was also something about the isolation of a rural upbringing that compelled him towards technology in the first place.
“I always used technology to overcome the distance barriers,” Kerr says. “Technology was a way for me to access the world. I always knew I’d be working in technology somewhere.”
An example of the client interface Pepperstone's client's use to trade currencies.
From obscurity to Asian idols and IPO
The simple premise of saving currency traders a heck of a lot of money has led to Pepperstone, in the less than four years since its launch, becoming the leading forex broker in Asia and the 11th biggest in the world. It boasts 20,000 clients worldwide and turns over $US80 billion in trades each month -- roughly equivalent to the turnover of the entire Australian stock exchange.
Kerr says Pepperstone has a home team advantage in the booming Asian marketplace -- China is its biggest market, and the broader region accounts for 80 per cent of total trades -- in contrast to its more US- and European-focused competitors.
Pepperstone was one of the first five platforms to gain a forex trading license in China (the first Australian firm) and, in addition to offices in Dallas and Melbourne, it has an office in Shanghai that is expanding.
“China’s going crazy, especially when it comes to financial markets,” Kerr told Business Spectator. “Their own currency is starting to become more tradeable since the government lifted the yuan trading ban. Soon they’re going to lift that further so as we see more price swings every Chinese person will be able to speculate on that -- just like we speculate on the Aussie dollar.”
Kerr and Davenport have ambitions to further solidify the company’s stronghold in the region and are aiming to become one of the top five forex brokers in the world within the next two years. (Pepperstone’s number one competitor is NYSE-listed FXCM; other big names include Gain Capital (forex.com), IG Group (IG Markets) and Tour de France sponsor Saxobank.)
Then there’s the IPO -- slated for “around October” -- which UBS and Citibank are advising Pepperstone on. The float is set to raise the company’s profile even higher, and will make it the only online forex broker listed on the ASX.
Whether Pepperstone can continue to leverage its leading position in the region and ride the boom to meet the ambitious goal of top-five broker in two years remains to be seen, but Kerr is confident their “superior product” and strong local ties will do the job.
“Competition is always a horse race but we’re constantly innovating,” he says. “It takes a lot of local knowledge to understand how the Asia-Pacific market works.”
The race is on -- and speed is one of the biggest money-spinners of them all.