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Lava Trading Sees the Upside in Separate Accounts

Lava Trading led a financing round for Upstream Technologies, a supplier of asset management technology to buy side firms that run separate accounts. Lava plans to link its direct access trading tools to Upstream's order-generation platform.

Lava Trading Inc. made a strategic investment in Upstream Technologies, LLC, a Boston-based developer of asset-management technology used by managers of separate accounts.

Lava plans to link its direct-access technology -- known for providing connectivity to all exchanges and multiple electronic communications networks -- to Upstream's order-generation-platform.

However, the amount of money that Lava invested was not disclosed. "We're not quantifying it, (but) it is a significant investment," says Richard Korhammer, Lava's chief executive officer.

Evan Schulman, Upstream's chairman declines to reveal the amount of the Series A financing round led by Lava, calling it "confidential," and adding: "It should be enough to take us to profitability."Until this point, Upstream has existed on angel money and sweat equity," says Schulman who along with CEO Mark Hoffman, founded the firm in 1999.

The Upstream Investment Management Platform is used to review thousands of individual portfolios and generate orders that reflect the firm's investment style and quality control.

"We take client's research and client restrictions and legacy holdings and fashion that into portfolios that are meant to track a particular model or benchmark, and so it's optimization or replication," explains Schulman.

The platform-- which spans domestic equities, fixed income, international securities and mutual funds -- also accommodates Multiple Disciplinary Accounts (MDAs), which mix two or more asset classes into a single account.

It's also a sign that the fast growing SMA business is attracting attention from broker-dealers who are Lava's clients.

"Brokers have been pushing(SMAs) as opposed to mutual funds for the tax benefits," says Schulman, who adds, "It's a growing field in a market that doesn't have many hot spots right now."

"It's a fast growing marketplace and that is valuable to Lava as well," notes Korhammer. According to the Money Management Institute, approximately $400 billion is currently under management by the managed account industry -- which amounts to a 21 percent compound annual growth rate over the past six years -- and it estimates that by 2010 assets will reach $2.3 trillion.

But, Korhammer says the implementation of Lava's technology and the technology that Upstream offers to clients "will not be used in the typical direct access fashion. We have sponsoring brokers who sponsor our technology to the buy side," explains Korhammer. They (buy-side firms) would be routing the orders to brokers, who would in turn be using the sophisticated Lava tools," he says.

Confirms Schulman: "Lava is a multi-broker system. It would be a technique for getting the orders back to the sponsor."

The way the SMA works is that "you have brokers that invest assets into SMA programs with the buy side. Quite often the commission or trading activity can get directed to these brokers, and so our technology can help them facilitate this type of trading," Lava's CEO says.

Korhammer says that Lava is in a different part of the food chain from Upstream. "They're in individual portfolio optimization, tax efficiency and legacy positions for money managers that need to manage large quantities of individual accounts. Because their (Upstream's) technology is very scalable, it is very important for running optimization analysis for thousands of portfolios," he explains.

"We are in the area of helping traders buy low as possible and sell as high as possible through intelligent algorithms when that part of the process is necessary," he adds.

Asked what attracted Lava to Upstream? "They're management is impressive, they are in a growth market and they have modern technology which works well for communication between our platforms, and they did have great customer references," he says.

Upstream's platform runs on a Windows 2000 and is Web-based delivery to the users through a browser. Because it uses XML for data loading and for generating orders, it's flexible enough to handle legacy systems. "Integration should not be much of a problem," says Schulman, who together with Upstream CEO Mark Hoffman, co-founded Lattice Trading, an alternative trading system sold to State Street Bank in 1996.

The firm's two largest clients include American Century for its private account program and a top 10 unnamed mutual fund company that recently selected the platform for separately managed accounts. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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