The Lookout: Nyfix trading system will pay off
redherring.com
By Paul R. La Monica
Red Herring
October 18, 2001
This article is from the October 1, 2001, issue of Red Herring magazine.
In the 1990s, the word "millennium" was hideously overused. Now that we're near the end of 2001, you'd think companies would stop using this tag for their products.
Well, it so happens that Nyfix (Nasdaq: NYFX), a developer of electronic trading systems for Wall Street brokerages, has created an alternative trading system that it has dubbed Millennium. Sure, the company deserves to be mocked for using such a worn-out moniker, but the prospects for Nyfix are so bright that investors should forgive the transgression.
Nyfix has already made a name for itself by selling trading workstations and exchange-floor systems on a subscription basis to brokers. These systems handle the routing of 20 percent of the daily volume on the New York Stock Exchange. Nyfix competes against other technology companies like Tradeware and the New York Stock Exchange's own routing network, the Broker Booth Support System.
It's been a successful endeavor for the ten-year-old company, which has a market capitalization of $379.5 million. In the first six months of this year, sales jumped 81 percent from the same period of the previous year to $17.9 million. Earnings, too, have increased at a healthy pace, soaring 57 percent in the first half of 2001 from year-ago levels. But what really makes the company an exciting investment opportunity is Millennium, which will match orders between buyers and sellers of huge blocks of shares.
THE MATCH GAME
Instead of merely routing orders to the right place, the company has plans to execute the trades itself, taking a larger bite of overall transaction fees in the process. The full launch for this system took place on September 5. While this may sound like nothing more than a typical electronic communications network (ECN), it's more than that.
With most ECNs, if a matching order isn't found within that ECN's system, the order isn't executed at all. On Millennium, orders that are not matched in the system will be routed to the exchange floor, increasing the likelihood that a trade will be made. "ECNs are two limit orders meeting in the night. But if trades don't match up on Millennium, they're sent down to the exchange and orders are anonymously matched," says Lou Holtz, portfolio manager for the Phoenix-Engemann Small and Midcap Growth Fund. As of June 30, Nyfix was the largest holding in this fund, accounting for 5.7 percent of the fund's net assets.
Nyfix is squarely focused on the NYSE, while most ECNs are chasing volume on the Nasdaq. Since Nyfix already has a strong flow of NYSE orders in its routing network, Millennium has the potential to execute a decent volume of trades, the majority of which are now handled by floor specialists.
Nyfix will earn a fee of half a cent for each side of the trade made through its system. That sounds like small change, but it adds up quickly. Nyfix routed an average of 456 million shares a day on the NYSE in first quarter 2001. "If we can execute the trades on just 10 percent of our current routing volume, that's more than $100 million in transactions a year," says Nyfix CEO Peter Hansen.
Of course, adding a transaction-based product to a business based on subscriptions will expose Nyfix's earnings to the volatile whims of the market. But since the company is building from a base of zero, such volatility shouldn't be a major concern. "The growth will outweigh any market effects in the short term," says Justin Hughes, an analyst with Robertson Stephens.
Analysts expect 2002 earnings for the company to be $1.24 a share, quadruple their current estimate of 31 cents for 2001. Mr. Hughes thinks Millennium will account for 40 percent of those earnings. Still, this growth seems not to be factored into the stock price yet. At $13.25 on October 16, Nyfix was trading at just 10.6 times 2002 estimates. That makes Nyfix a bargain that shouldn't be passed up. |
