tech Boom Times for Financial Technology M&A By Bennett Voyles

he merger wave among exchanges has costing them a million, million and a half Clearing Corporation that is widely used in subsided, but further down the food a year, versus going out and licensing the other over-the-counter markets. Tchain smaller companies are being software just like an end user would for a “We have been working with the FX gobbled up right and left. fraction of that cost?” industry since October 2010 to provide a Worldwide, there have been at least 70 Another driver has been timing; invest- complete processing solution for mar- trading technology deals in the past year, ment bankers say some of the smaller com- ket participants,” Jeff Gooch, the chief ex- according to data from FT Partners, a San panies are now more willing to sell out. ecutive officer of MarkitServ, said when the Francisco investment bank focused on fi- “The industry has been shaken up a lot and deal was announced. “Logicscope’s comple- nancial sector transactions. And more are a lot of smaller companies have suffered as a mentary technology and comprehensive on the way, according to Steve McLaughlin, result,” said McLaughlin. “I think over the product suite will enable us to offer the the firm’s managing partner. course of time price expectations have come same standards of trade processing, connec- “I think the pipeline is good. I think down as well as optimism about market re- tivity and compliance to FX market partici- you’ll continue to see the same trend for the covery in volume, so that has led to some pants that we currently offer for credit, rates next couple of years,” McLaughlin said. M&A activity.” and equity derivatives.” One driver is technology; advances in Venture capital cycles are also driving some In March, Markit announced a new ser- electronic trading have created demand for of the action. Investments in financial tech- vice that highlighted the value of the Logic- a host of specialized technologies for linking nology companies that might have been sold scope acquisition. Market participants that traders to markets as well as greater inter- between 2007 and 2010 were delayed until need to submit FX for central clear- est in outsourcing connectivity to service now because of market conditions, McLaugh- ing are now able to use MarkitServ as a sin- providers. Another is regulation; the global lin commented. “People were holding out gle point of access to CME Group, LCH. derivatives reform is forcing market par- until a pretty good moment in time,” he said. Clearnet and SGX. That type of “middle- ticipants to overhaul their trade processing “Pent-up sellers are now picking 2012 or 2013 ware” solution solves the need for market systems and establish connectivity to new as the time they want to get out.” participants to meet clearing requirements trading venues and clearing platforms. Looking through the list of recent deals, without having to build their own connec- Many of the recent deals involved a several interesting themes emerge. tions to each clearinghouse. merger between two specialized technology companies. In other cases, smaller compa- Getting into a New Asset Class Leveraging Technology nies with niche expertise are merging with Markit’s acquisition of Logicscope is an After European antitrust regulators frus- larger companies able to offer a more com- example of a deal that helped the acquirer trated its bid to combine with Deutsche plete end-to-end solution. extend its expertise into a new asset class— Boerse, NYSE redoubled its in- “Some of these smaller providers need and capitalize on the global changes to vestment in technology services, an alter- to become part of a bigger solution,” said derivatives markets. Logicscope has a well- native path for growth that focuses less on Adam Honoré, director of research for Bos- established niche in the foreign exchange where the liquidity is going and more on ton-based Aite Group. He added that he markets as a provider of trade processing how it gets there. spends a lot of his time arranging partner- technology and connectivity. Its principal So far, the strategy seems to be working. ships between vendors that want to knit to- product is TradeSTP, a system that consoli- Technology services have been the fast-grow- gether a more comprehensive solution. This dates and routes trade messages to end-us- ing segment of NYSE Euronext over the past in turn will lead to more mergers down the ers. The system is connected to a wide range five years. Revenues from such services as co- line, he predicted. of execution venues, including not only the location and software licenses have climbed Case in point—feed handlers for mar- multilateral platforms such as EBS and FX- from $130 million in 2007 to $358 million ket data. Honoré explained that it does not All but also a long list of the major dealers, in 2011, accelerated by acquisitions such as make sense for companies that specialize and its clients include more than 400 finan- its purchase of Wombat, a data service pro- in building trading systems to write their cial institutions that trade FX. vider, in 2008 and NYFIX, an electronic own applications for receiving and process- When Markit announced the deal last trading services provider, in 2009. ing the market data feed for every trading September, the company said it wanted to In its latest move, NYSE Euronext in Feb- venue. Instead, it makes more economic use Logicscope’s platform to accelerate its ruary purchased a 25% share in Fixnetix, an sense to outsource that function, he said. plans to extend its trade processing services IT outsourcing service that supports ultra- “Why should an execution management into foreign exchange markets. Those ser- low latency trading, market data process- vendor continue to build and support all its vices are provided through MarkitServ, a ing and real-time risk management. NYSE own feed handlers,” he commented, “if it’s joint venture with the Depository Trust and Euronext reportedly paid £17.5 million tech

($27.5 million) for the stake and also re- ceived the to buy the rest of Fixnetix Financial Technology M&A at any time over the next three years. Selected transactions announced since January 2011 that have involved exchanges, trading firms and other companies involved in the trading and clearing of securities and derivatives At the announcement, NYSE Euronext said the deal would make it possible for the Date Transaction Summary company to augment the IT services now 5/29/12 Knight Capital Group buys Penson Futures for $5 million. available through its NYSE Technologies 5/10/12 Spectron buys clearing business from Schneider Trading Associates and division. For its part, Fixnetix said the deal merges it into its professional services group. would allow it to extend its U.S. coverage and expand into Asia. For both companies, the 5/9/12 Markit buys Cadis, a company specializing in enterprise data management. partnership allows them to capitalize on the 5/2/12 Equinex, a global data center services provider, buys Asia Tone, a Hong Kong- growing desire in the trading community for based data center provider, for $230.5 million. integrated end-to-end technical solutions. 5/2/12 Tullett Prebon buys Elevation, an equities and equity derivatives broker based in “Acquiring this strategic interest in New York. Fixnetix allows us to better leverage our 4/30/12 Maple Group Acquisition Corp., a consortium of Canadian financial institutions and combined technology presence to reach pension funds, offers to buy Alpha Trading Systems, an alternative trading plat- more customers in more locations,” Mi- form, for C$175 million and Canadian Depository for Securities for C$167.5 million chael Geltzeiler, group executive vice presi- as part of a renewed offer for TMX Group. dent and chief financial officer of NYSE Eu- 4/25/12 Nasdaq OMX buys NOS Clearing, a Norwegian commodity clearinghouse, for NOK ronext, said when the deal was announced. 230 million ($40.4 million). Thinking Global 4/3/12 S&P Capital IQ, a division of The McGraw-Hill Companies, acquires QuantHouse, a One of the biggest financial technology provider of market data and trading solutions. deals this year was the $230.5 million pur- 3/9/12 Group offers to buy majority stake in LCH.Clearnet for chase of Asia Tone by Equinix. Both com- €463 million ($607 million) in cash. panies are providers of network and co-lo- 3/9/12 IMC Financial Markets buys 9.99% stake in TOM, a Dutch company that combines cation services, and many of their clients are a multilateral trading facility with smart order routing to other trading venues for financial institutions and trading firms that European equities and equity options. need high-capacity, low-latency connec- 3/6/12 Sun Trading, a -based proprietary trading firm, announces acquisition of tions to market venues. Through this deal, Endeavor Trading, a Chicago-based proprietary trading firm. Equinix gained data centers in Hong Kong, 2/21/12 CME Group and Oman Investment increase their stakes in the Dubai Mercantile Singapore and Shanghai, bringing its global Exchange. network to 104 data centers in 38 markets 2/16/12 NYSE Euronext buys 25% of Fixnetix, a U.K. company that provides low-latency and strengthening its presence in three of market data, risk controls and other technology services, with option to buy the Asia’s leading financial centers. remainder within three years. Although Equinix serves a wide range of industry sectors, are a 2/7/12 Brady, a supplier of trading and risk management solutions for energy, metals and major focus. Equinix positions itself as the soft commodities, acquires Navita Systems, a Norwegian provider of software and services to the energy and commodity trading community, for NOK 150 million host for a “high-performance global trading ($25.1 million). ecosystem” that allows traders to optimize their connectivity to clearing firms, market 1/31/12 Nordic Capital, a private equity fund, acquires Orc Group, a trading technology venues and other service providers. provider, for SEK 2,021 million ($293 million). 12/19/11 INTL FCStone buys TRX Futures, a soft commodities broker based in London. Regulation Is 12/12/11 Virtu buys NYSE Amex floor operations business from Cohen Capital. a Growth Industry 12/12/11 Group buys 50% of FTSE International from Pearson for Just in time to meet the massive new £450 million ($705 million) in cash, giving LSEG 100% ownership and control. data-collection requirements of Dodd- Frank, Basel III and Solvency II, Markit an- 11/30/11 Getco buys NYSE floor operations business from Bank of America Merrill Lynch. nounced a deal in May to purchase Cadis, 11/29/11 TMX Group agrees to acquire Razor Risk Technologies, an Australian provider of a financial data management company credit risk software, for $9.9 million in cash. founded in 2007. Cadis’ enterprise data 11/28/11 ION Trading, a provider of trading technology that is partly owned by the private management platform consolidates data equity firm TA Associates, offers to acquire the remainder of the shares in software from multiple sources within a centralized vendor Patsystems that it does not already own. hub, providing users with reliable, transpar- 11/22/11 agrees to acquire Osaka Securities Exchange for approxi- ent and auditable data. mately $1.2 billion. “Data management is top of just about every financial institution’s agenda; the scale Financial Technology M&A and complexity of the data they are manag- ing have never been greater,” Lance Uggla, Selected transactions announced since January 2011 that have involved exchanges, trading firms and other companies involved in the trading and clearing of securities and derivatives Markit’s chief executive officer, said at the Date Transaction Summary announcement of the sale. “Data is increas- 11/22/11 FFastFill agrees to acquire WTD Consulting, a Chicago-based firm that provides ingly at the heart of financial institutions,” technology consulting and software solutions, for $12 million. added Daniel Simpson, the chief executive officer of Cadis. “By combining our exper- 9/21/11 Markit buys Logicscope, a provider of post-trade services for foreign exchange trading. tise with Markit’s distribution and customer network, we will be able to help more firms 8/3/11 FFastFill acquires Spread Intelligence, a London-based provider of spread trading meet increased regulatory pressures and risk tools, for £1.5 million ($2.37 million) in cash and shares. management demands.” 8/1/11 NYSE Euronext announces agreement to buy Metabit, a Tokyo-based market ac- cess firm. Clicks Like Bricks 7/21/11 Patsystems agrees to acquire Mixit, a U.S.-based vendor of trading systems for While most of these deals highlight equities and options, for $20.2 million. the value of technology, two of the most 7/14/11 Getco buys Automat, a London-based proprietary trading firm. technologically advanced firms are mov- ing in the opposite direction. In the last 12 7/14/11 IntercontinentalExchange announces acquisition of 12.4% stake in Brazil’s Cetip months, Getco and Virtu Financial, both for approximately $515 million in cash. of which are masters in the use of low- 6/10/11 Maple Group Acquisition Corp., a consortium of Canadian financial insitutions, an- latency trading technology and automated nounces plan to acquire TMX Group for $3.6 billion. market making, have expanded their floor 6/7/11 Deutsche Boerse acquires SIX Group’s 50% stake in Eurex for $862.5 million in trading businesses. cash and equity. In November, Bank of America Merrill 5/31/11 Virtu Financial merges with Madison Tyler Holdings, a market-maker and elec- Lynch sold its floor trading business at the tronic trading firm, and secures funding from Silver Lake, a private equity firm. to Getco, and in 5/27/11 Deutsche Boerse acquires Kingsbury International, a U.S.-based business and December, Virtu made a similar deal with economic consulting firm. Cohen Capital to buy its floor trading busi- ness on NYSE Amex. 5/22/11 Correlix, a provider of latency management services, secures $9 million in financ- ing from several private equity funds including Blumberg Capital and Vernon & In Getco’s case, the deal meant that the Park. firm took over “designated market maker” assignments for dozens of stocks that trade 5/4/11 Colt Group, a U.K. telecommunications company majority-owned by Fidelity, ac- on the NYSE floor. All told, Getco is the quires majority stake in MarketPrizm, a company that provides low-latency market DMM for approximately 650 companies data and order entry infrastructure that is controlled by Instinet. and a total of 850 securities at the NYSE. 4/7/11 Jefferies Group buys Bache Global Commodities from Prudential Financial for $430 What prompted Getco to go against million. the tide and buy into a business that still 3/22/11 Marex Group buys Spectron Group for £94.5 million ($154 million). involves human beings engaged in manual 3/21/11 Standard Chartered buys 3% stake in United Stock Exchange of India. processes? Quite simply, Getco intends to use its advanced trading technology to sup- 3/21/11 Charles Schwab buys optionsXpress for $1 billion. ply more competitive prices to the NYSE 2/25/11 Cinnober Financial Technology, a Swedish software trading company, buys 3% floor, attracting more business there and stake in U.K-based FFastFill. boosting its profile among potential buyers 2/25/11 IntercontinentalExchange buys Ballista Securities, a registered broker/dealer that of its trading services. offers an electronic platform for the execution of block-sized and complex multi- “We viewed the acquisition of the Bank of leg options transactions. America DMM as a further extension of our 2/23/11 Eurex buys majority stake in European Energy Exchange. core market making business,” said Getco 2/15/11 Deutsche Boerse and NYSE Euronext announce proposed merger. The exchanges spokeswoman Sophie Sohn. “The NYSE ex- terminate agreement one year later after a decision by the European Commission change model provides a unique value proposi- to block the proposed merger. tion for U.S. listed companies and allows tech- 2/9/11 London Stock Exchange Group and TMX Group announce proposed merger. LSE nology focused firms like Getco to integrate terminates its offer in June 2011. the best aspects of electronic markets with the benefits of a human trader’s perspective.” 2/3/11 Micex Group buys majority stake in RTS Group.

Source: Financial Technology Partners, company filings. Bennett Voyles is a freelance journalist.