Merger to Boost Upstarts’ Battle for Stock Trades
Tradescape.com, a fast-growing online brokerage, is expected to announce today that it will buy one of the leading after-hours stock-trading venues, in a deal that could accelerate the availability of sophisticated trading systems to small investors.
The New York-based brokerage and software firm will shell out $100 million in stock to acquire MarketXT Inc., one of the new breed of so-called electronic communications networks that are competing fiercely with the Nasdaq Stock Market and the New York Stock Exchange.
Tradescape.com also plans to operate MarketXT during regular trading hours, in a direct challenge to conventional markets.
The merger is the second big deal in a week involving a firm with roots in the day-trading industry. Three-year-old Tradescape.com develops software for day traders and owns several day-trading offices around the country. A week ago, leading online brokerage Charles Schwab Corp. agreed to pay $490 million to purchase CyBerCorp Inc., an Austin, Texas-based day-trading software firm.
MarketXT, meanwhile, has been backed by such major Wall Street firms as Morgan Stanley Dean Witter, Citigroup’s Salomon Smith Barney, Bernard L. Madoff Investment Securities and Warburg Pincus Ventures. Those firms now will become stakeholders in Tradescape.com. It will mark the first time that blue-blood investment houses have invested in a day-trading shop.
What’s more, Wall Street firms led by Japanese investment giant Softbank Corp., already a Tradescape.com stakeholder, have agreed to invest $100 million in the firm to finance the MarketXT purchase.
Hence, this deal, and Schwab’s acquisition of CyBerCorp, underscore that despite the negative publicity surrounding day trading, the advanced trading systems of some day-trading firms have become highly sought-after by Wall Street--in large part because the systems are expected to eventually prove popular with mainstream online investors.
Tradescape.com and CyBerCorp both have designed “smart order-routing” technology that automatically sends investor stock orders to the market with the best available prices. The technology works hand-in-hand with ECNs, which allow investors to meet directly via the Internet to buy and sell, rather than having to rely on a Wall Street dealer, or a stock exchange, to act as a middleman.
A problem with competing ECNs is that they aren’t linked. Smart order-routing technology can solve that problem by searching all ECNs for quotes, thereby increasing an investor’s odds of getting “best execution”--basically the best price to buy or sell a stock at any moment.
Though next-level trading systems remain relatively unknown among amateur investors, that is likely to change in the next few years as investors become better aware of their options, analysts say.
“Remember what online brokerage was three years ago? People were scared and weren’t really sure [online investing] would take off,” said Russell Keene, an online brokerage analyst with investment firm Putnam, Lovell, de Guardiola & Thornton Inc. “And bam, all of a sudden you have this rush and acceptance. As people become even more familiar with the markets, it won’t be unheard of for average investors to talk about ‘best execution.’ ”
Indeed, Securities and Exchange Commission Chairman Arthur Levitt has over the last year sought to raise awareness of trade-execution issues, urging investors to focus on whether they are getting the best possible price when they trade.
The deal instantly boosts MarketXT’s efforts to compete against ECN rivals such as Island and Instinet--and against Nasdaq dealers. ECNs already control 37.6% of all trading in Nasdaq stocks, according to Chase/Hambrecht & Quist. What’s more, many ECNs are moving to begin trading NYSE stocks.
“We step up and get a lot of visibility into the ECN sector,” said Omar Amanat, Tradescape.com’s chief executive. “The day-trading technology that people don’t know about now is going to be at the forefront and driving a lot of the change” among ECNs.
MarketXT is best known for letting amateur investors trade stocks after the close of traditional markets each day. But at an average of less than 100,000 shares a day, trading on MarketXT, which is open 2 1/2 hours each weekday afternoon, has been very light.
However, Tradescape.com plans to operate MarketXT during the regular trading day beginning next month. Tradescape.com also will funnel through MarketXT the average 40 million shares traded each day by its brokerage clients.
Said Michael Sanderson, chief executive of MarketXT: “It gives us an immediate rush of volume.”
Volume is key among trading systems because investors are more willing to place orders on systems that already have a large number of orders, and, therefore, a greater chance of finding other investors with whom to trade.
