Going Direct

The wave of consolidation hitting the direct-market access (DMA) technology sector hammers home just how important the space has become for Wall Street and the impact it can have on institutional relationships with buy-side firms. It's also prompting new players to step into the market.

According to Jodi Burns, an analyst with Celent Communications, "We're seeing a lot of acquisitions of the direct-access firms by the broker-dealers." She explains that the trend is a response to the adoption of direct-access technology by buy-side firms. "Sell-side firms are asking, How can I deepen my relationship with my buy-side customers?" One way to do that is to offer the buy side a direct-access platform, she says.

The acquisitions are raising concerns in the industry, however, that broker neutrality - a feature that many of the direct-access firms used as a sales enticement - has been tossed out the window. The consolidation also raises the specter of leakage of trading information and questions about whether firms can expect to get best execution when exercising their trades.

Survival of the Fittest

In early July, Citigroup's corporate and investment banking group acted on its resolve to get more involved in the execution side of the business by scooping up Lava Trading, the 800-pound gorilla in the direct-access market. Though figures were not disclosed, estimates place the price tag at more than $500 million. Citigroup says Lava will operate as an independent subsidiary; Lava's CEO, Richard Korhammer, will report to James Forese, managing director and head of Citigroup Global Equities.

That followed a March deal in which Bank of New York Securities acquired direct-access provider Sonic Financial Technologies. The bank says the deal allows BNY Securities Group to provide broker-dealers and institutional investors with enhanced smart order routing and improved direct-access trading to all major equity markets, including the New York Stock Exchange and other exchanges, Nasdaq, and alternative-trading systems. Shortly after the purchase, BNY launched DEx, short for direct execution services, a suite of direct-market access trading solutions that helps institutional investors manage their trading and execution strategies.

And one of the first out of the acquisition block was Bank of America, which acquired Direct Access Financial of Dallas, a provider of direct-access trading technology to the institutional brokerage and investor community, in February. Direct Access Financial, which became an operating unit of Banc of America Securities' global equities group and part of its electronic trading services unit, is charged with developing technologies to lower trading costs and improve institutional clients' ability to manage equity flows.

Andrew Fishman, president of the Schonfeld Group, which has 500 proprietary traders that oversee $600 million in investments, says, "The acquisition binge under way is an admission by Wall Street that it wasn't paying much attention to direct access and the development of the technology associated with it." Fishman's firm specializes in short-term trading and recently launched Schonfeld Institutional Brokerage Services, a joint venture with direct-access provider Trinix Securities.

Despite the consolidation, according to Larry Tabb, of The Tabb Group, "There's an opportunity for new players to come into the market that are broker-neutral."

"Broker neutrality is still an important aspect to direct access," Celent's Burns says. "I think the buy side is not interested in wedding themselves to any one particular broker. They like the idea of forcing the brokers to compete for their business."

Burns asserts that Lava has a challenge on its hands now that Citigroup has acquired it. "They need to create a sense of independence, or it will hurt Lava," she says, quickly adding, "It's possible to run an independent subsidiary." Disclosing how they've restricted communications across the companies in Citigroup's public filings "can really go a long way toward convincing customers that Lava is independent," she continues.

But Richard Korhammer, CEO of Lava, thinks concerns about his firm's independence are overblown. "It's business as usual. We are independent," he says. "We expect to maintain all the confidentiality we have in the past. People are looking for technology to help them get a great price. Ultimately, the buy-side traders are no different than the sell side - they want to take matters into their own hands and trade."

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