10/26/99 Dow Jones News Serv. 16:05:00
Dow Jones News Service
Copyright (c) 1999, Dow Jones & Company, Inc.
Tuesday, October 26, 1999
ECNs Brut, Strike Technologies Agree To Merge
By Greg Ip
NEW YORK -(Dow Jones)- Two of the country's nine electronic communications
networks, or ECNs, said they agreed to merge, in what could signal a
consolidation of the many trading systems now competing with traditional
markets.
The boards of Strike Technologies LLC and Brass Utility LLC (popularly known
as Brut) said Tuesday they had signed a letter of intent to merge. They expect
the merger, for which some details have not been settled, to close by the end
of the year. Both are based in New York.
ECNs automatically collect, display and execute customers' stock orders.
Although regulated as brokers, they behave more like stock exchanges, and their
proliferation in the last three years has posed a growing threat to the Nasdaq
Stock Market and New York Stock Exchange. But while they provide cheap and fast
executions, their growth has also "fragmented" volume among multiple locations,
making it harder for investors to ensure they're getting the best possible
price on their entire order.
Wall Street firms have invested in many of these trading systems as a hedge
against the demise of traditional markets, but they are increasingly pressing
for consolidation among them. The Brut-Strike merger was a natural place to
start, because both count major Wall Street firms, which provide orders to the
systems, as principal shareholders.
"Consolidation is going to continue in this industry and this is the first
step along the way," said Matthew DeSalvo, managing director and head of Nasdaq
trading at Morgan Stanley Dean Witter & Co. (MWD) and a member of the board of
Brut. "Because of the 30 broker-dealers involved, this will be a tremendous
source of liquidity."
"Either Strike or Brut could continue on their own, but I was convinced that
combined it would be a power to reckon with," said Buzzy Geduld, a member of Strike's board and head of Herzog Heine Geduld, a Nasdaq stock dealer that is
one of Strike's principal shareholders.
Company officials expect the merger to be completed by year end.
The agreement, which was expected, would create what its shareholders say
would be the country's third largest ECN, behind Reuters Group PLC's Instinet
Corp. (RTRSY) and Datek Online Holdings Corp.'s Island ECN Inc., with a
combined daily volume of about 40 million shares (adjusted to avoid double
counting). However, definitive ECN volume data is elusive and some other ECNs
might contest that title. Instinet claims daily volume of more than 150 million
shares. Other major ECNs include Archipelago Holdings LLC, which has some of
the same shareholders as Brut, and REDIBook, which has some of the country's
largest brokerage firms catering to individual investors as participating
shareholders.
Under terms of the agreement, which is being billed as a merger of equals,
Sungard Data Systems Inc. (SDS), a computer services company which supplies
back office technology to brokers and now owns 56% of Brut, will own 20% of the
combined entity, tentatively called Brokers Utility. Morgan Stanley, Merrill
Lynch & Co. (MER), Goldman Sachs Group Inc. (GS) and Knight/Trimark Group Inc.
(NITE), the minority shareholders in Brut, will own 30%; and the 26 current
shareholders of Strike, the most prominent of which are Bear Stearns Cos.
(BSC), Citigroup Inc.'s (C) Salomon Smith Barney unit, Herzog, and Bridge
Information Systems, will own 50%.
The new entity will likely prove a formidable competitor to market leader
Instinet for several reasons. Its shareholder base now includes most of Wall
Street's largest providers of order flow; and it will allow institutional
investor customers to pay their fees to the broker of their choice rather than
the ECN, thereby helping pay the brokers for other services like research or
access to initial public offerings.
Brian Hyndman, currently president of Brut, will remain president of the
merged entity. A search will begin for a chief executive officer.
It is not known what role, if any, Strike's president and CEO, Arthur
Pacheco, will have in the new organization. People familiar with the
negotiations said Pacheco was not in favor of the merger as currently
structured. Strike, which only began operating this year, is small but is
admired for its adaptable Internet-based technology. Brut, through its Sungard
connections, has access to most Wall Street trading rooms.
Pacheco said in an interview, "Obviously some of our shareholders see some
value in this, and have an obligation to explore that." He said he did not know
what his future role was.
Morgan Stanley acted as adviser to Sungard.
-Grep Ip; 201-938-5099 |
