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MarketAxess Diversifies with Acquisition of Greenline Financial Technology

New York: 11 March 2008

By Ivy Schmerken

March 11, 2008

In a move to diverse its revenues beyond the credit markets into electronic trading of other asset classes, last week fixed-income trading platform operator MarketAxess Holdings said it had acquired Greenline Financial Technologies, a Chicago-based provider of FIX protocol messaging, certification and monitoring services to institutions, dealers and exchanges for $42 million.

Greenline Financial Technology focuses on developing Financial Information Exchange (FIX)-related products and services that are used to optimize electronic trading of fixed income, equities and other exchange-based products. The FIX Protocol is the defacto global standard for electronic trade communications and connectivity to trading venues.

The deal will diversify MarketAxess's revenues away from the trading of high grade corporate and emerging market bonds and other fixed income securities into high-qualify FIX messaging services for electronic trading markets in equities and exchange-traded futures and options.

"What attracted us to Greenline are the growth characteristics of FIX messaging in all markets," comments Richard McVey, chairman and CEO of MarketAxess in an interview. "We saw a market that is highly likely to grow at attractive rates over the next three or four years and a company that has leading products around FIX certification, testing and monitoring," explains McVey.

But the publicly traded operator of credit marketplaces also expects to capitalize on the adoption of the FIX protocol in fixed income, which could fuel its electronic trading volumes. While electronic trading is highest in the most liquid products, which are government bonds, McVey says there is a growth opportunity in the credit related instruments. Today, about 10 percent of all corporate-bond trading reported into financial regulator FINRA's Trade Reporting and Compliance Engine (TRACE), is electronic while the other 90 percent is still trading on the phone, notes McVey.

The growth potential in FIX messaging is a combination of new institutions using FIX and larger sell-side firms expanding their use of FIX, says McVey. "The larger dealer institutions have been utilizing FIX in their equity business for a long time, but it's moving into other asset classes including fixed-income," says the CEO.

In a recent study, cited by MarketAxess, TowerGroup estimated that 75 percent of buy-side organizations and 80 percent of sell-side organizations now use FIX. But Tower Group projected that total FIX end users are expected to grow four times between 2005 and 2009.

Nick Themelis, CIO of MarketAxess, predicts that "Long time FIX users that have built their own home-grown tools and testing capability migrating to Greenline because they don't want to continue to invest in maintaining those tools. Greenline does a good job of testing and certification at a fair price," says Themelis

In addition, the acquisition of Greenline brings important diversification to the company, says McVey. With the Greenline acquisition, "We are already in other asset classes," says McVey, noting that Greenline is providing services into the electronic trading markets in equities and the exchange-traded products. "Yes, this is a move into other asset classes," confirms McVey.

Greenline is an innovator specializing in customized integration and testing, certification and monitoring of FIX messaging solutions for equities and the exchange-traded futures and options. It provides all the tools necessary to develop a FIX environment including professional services, custom development and strategic consulting, that facilitate electronic trading.

Founded in 2000, the company has 38 employees and maintains three offices in Chicago, London and Argentina. The Chicago office is close to the derivatives exchanges; the London office is used for European sales and the office in Argentina is a development center. Total revenues were approximately $6 million for the year ended Dec. 31, 2007, an increase or approximately 40 percent from the year ended Dec. 31, 2006.

While MarketAxess serves 30 dealers on the market maker side and close to 700 institutions, Greenline currently has 120 clients, including hedge funds and global exchanges, which broadens the client base for MarketAxess. What's more, there are "cross-selling opportunities to promote their products to a much broader institutional community," says McVey.

The technology acquisition falls on the heels of MarketAxess acquiring Trade West Systems in November of 2007 for an undisclosed amount. The Salt Lake-City-Utah based company provides gateways and adapters to the fixed income community and connectivity to about 24 trading venues. "It speaks to the commitment we have about gateways and to e-trading," says McVey. Trade West Systems connects dealers to trading venues and some back offices and to settlement systems such as TRACE.

MarketAxess plans to retain the name and the brand of Greenline Financial Technology, but it will be part of a recently established unit called Market Access Technology that will also house Trade West Systems. Both acquisitions reflect the company's confidence in the growth of technology services around all financial markets, most notably, fixed income, says McVey.

"We are getting deeper into the connectivity services in trading and messaging to complement what we have done in the e-trading space," says McVey. While Market Access's main competitors are Thomson TradeWeb and Bloomberg, those companies do not compete with Greenline in the FIX testing and certification space.

But will the dealers and asset managers continue to invest in FIX technology given the ongoing fall-out from the credit crisis in sub-prime mortgages and structured products? "FIX messaging is all about making trading operations more efficient and we believe dealers and investors in this environment will increasingly spend money in areas that will make them more efficient," says McVey.

Meanwhile, Braden Janowski, the founder and CEO of Greenline is going off to start a new company in the algorithmic trading space called Trade Helm. The former COO of Greenline, Josh Tolman, was recently named president of Greenline Financial Technology.

Link to article: MarketAxess Diversifies with Acquisition of Greenline Financial Technology