Citi's Acquisition of ATD Intersects with Private Equity

It's no accident that Citigroup (Citi) is close to acquiring Automated Trading Desk, a computerized market-making firm for $700 million, as reported by the Wall Street Journal Online yesterday and Reuters this morning. Both financial services companies have connections to the private equity world where relationships are cultivated and exit strategies are born.

In January of this year, ATD received a $60 million investment from private equity firm Technology Crossover Ventures (TCV) based in Palo, Alto, Calif. Back in April of 2002, Lava Trading secured a $30 million financing led by Boston-based TA Associates. TA eventually exited the investment in Lava by selling Lava to Citigroup in 2004. "TA Associates was the primary equity firm that invested in Lava Trading before it was sold to Citibank and Lava was almost entirely a technology play," said Peter Kent, CFO of ATD said in an interview with Wall Street & Technology last month. [See "Private Equity Gold Rush," July 2007]During the process of seeking investment dollars, Kent said ATD got to know all the private equity players investing in its space, so it's possible that ATD caught the eye of Citi-Lava through connections to TA Associates, or that Citi was simply hunting for an acquistion in the high frequency trading arena and knew ATD's management.

Kent also spoke about the value that private equity firms bring in opening the door to new relationships both in the broker-dealer and buy-side community. "They've opened doors that either we weren't aware of or weren't open to us previously," said Kent, referring to broker dealers. "A lot of firms have called us now as a result to the deal," the CTO said during the interview in late May.

Obviously, TCV must approve the sale of ATD to Citi. But why is TCV unwinding its position in ATD six months after investing $60 million? Private equity firms always look for an exit strategy to recoup their investment and earn a return for investors. "Any firm that takes private equity capital (has) the expectation that there will be an extent even for those investment dollars," said Steven Swanson, CEO of ATD in the May interview.

"In most cases private equity firms make these investments and their preferred method of exit is IPO," said Swanson back in May. While private equity firms claim they make long-term investments, which can range from three to five years, Bob Trudeau, general partner in TCV, said "We have no specific design on that," referring to time frame. "Our view has always been if you build a great company, exits will take care of itself," said Trudeau in May. Ultimately, Trudeau said the sale of the company or an IPO would be the exit strategy."Those were the two most likely scenarios - either a strategic player in the financial market could think of ATD as a very important business and set of skills and technologies they need to own, or there is also the opportunity to access the public market if management would welcome the opportunity," said Trudeau, In this case, TCV took a quicker exit than perhaps was initially planned because a strategic buyer in Citi-Lava emerged.

An industry source that requested anonymity said the purchase of ATD is a strategic buy for Citigroup, which looks to build up its high frequency trading operations. Citi already owns Lava Trading, which it folded into the brokerage and so it could conceivably integrate Lava's smart-order routing tables into ATD's quantitative models.

Related Article: Read Celent's commentary on the possible ATD aquisition by Citigroup.

ATD, located on a sprawling campus in Mount Pleasant South Carolina, uses algorithms to move in and out of U.S. stocks, capturing minute inefficiencies. The firm plans to move into international equity trading and then U.S. options trading.

Commenting on the potential deal, Brad Bailey, a senior analyst at Aite Group, said, "ATD has a nearly 20 year history of quantitative equity trading, eking out small profits in low risk, high-volume trading as well as providing quantitative execution services to their clients. And ATD is not limited to equities. Recent structural changes in the options market have led ATD to consider the evolution of US options to a much more electronic model of trading." 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