Electronic trading firms draw attention
By Greg Morcroft, MarketWatch
Last Update: 5:17 PM ET Jan. 9, 2006
NEW YORK (MarketWatch) -- With the ink all but dry on two landmark pacts on stock-exchange mergers, investors in recent days have sharply lifted shares of small companies that design electronic trading systems.
Tradestation and Investment Technology Group, or ITG, are both expected to benefit from increased electronic trading from the two exchange mergers, as well as a new regulation that has opened the door to more electronic trading.
Since the beginning of January, shares of ITG have risen more than 12% while Tradestation is up almost 20% in the same period.
MarketAxess, which operates trading systems for fixed-income securities, could benefit from growth in demand for direct access to those markets. MarketAxess has risen about 4% since the beginning of the year.
In early December, the Nasdaq completed its acquisition of electronic stock trading platform Instinet in a move aimed at strengthening Nasdaq technology and building its market share amid rapid consolidation in the trading business.
Meanwhile, the 213-year-old New York Stock Exchange is in the throes of transforming itself into a 21st-century exchange. Its pending merger with electronic-exchange operator
On Monday, analyst Rich Repetto at Sandler, O'Neill upgraded International Technology shares, and the stock rose about 7%.
"We believe that ITG is uniquely positioned to benefit from the regulatory and industry changes expected in 2006 and beyond," Repetto wrote in a research note.
Factors in the company's favor include the makeover of the Big Board, the growing trend of unbundling execution services and research, and brokerages' continuing focus on execution costs, Repetto said.
Last year the Securities and Exchange Commission passed a rule that mandates the NYSE to introduce more automation, a move seen as accelerating growth in trading volumes and more business for firms like ITG, Tradestation and MarketAxess.
The growth of firms specializing in so-called direct market-access systems is also fueling the sector's appeal among possible acquirers.
Acquiring companies who cater to institutional clients are increasingly interested in using the technology, which was developed for retail customers
"As a result of the recent strategic shift among retail brokers away from transaction-oriented business, the most active acquirers ... have been large brokerage/banking firms," Daniel Goldberg, a Bear Stearns analyst, wrote in a recent research report.
"With declining numbers of semi-professional traders and increasing hedge-fund business, DMA firms are designing more powerful systems for greater institutional usage," he wrote.
Nine acquisition deals were reached in 2005, according to Goldberg, and he expects more as the systems catch on in other markets, like commodities, currencies and fixed income.
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