Southwest Securities

(SWS)

has been openly up for sale, or at least had investment banker

Bear Stearns

looking for a partner, for the past two months. Potential buyers, though, would be wise to read the fine print before writing a check.

What they'll find is a complex Dallas-based firm where revenues have skyrocketed, in part due to clearing and executing trades for daytrading firms. But that ballooning volume has stretched Southwest's technical and personnel resources and irked its broker-dealer customers enough to cause some defections, while at the same time catching the eye of

New York Stock Exchange

examiners.

Though the company and one analyst say the technical problems won't hamper the company's acquisition hopes, it's clear any buyer will have to digest these lingering problems. In addition, an acquirer would have to swallow Southwest's reliance on daytrading. While investors were hot for

Charles Schwab's

(SCH)

purchase of a daytrading firm earlier this year, regulators have spent the past year clamping down on the practice, which involves rapidly jumping in and out of stocks.

Southwest says it's a victim of its own success, doubling its trading volume at the same time it was introducing a new clearing system. But the company says the problems haven't been insurmountable. "Sometimes this stuff gets extrapolated into a far greater problem than it is," says David Glatstein, Southwest's president and CEO.

Desert Storms
Southwest Securities is looking for a suitor, but investors haven't fallen in love with the shares lately.

At the root of the problems are conflicts between the firm's old and new back-office systems, both of which are still running. "There is no question that we have problems ... caused by running two systems parallel to each other. I believe much of that poor service is starting to decrease," Glatstein says. "We're not back to normal, but we are better."

A rich suitor could help Southwest's technology catch up to the firm's heavy trading volume. For example, in March the company says it processed a record 577,000 trades daily, up from an average of 160,000 trades a day last summer. Despite the volume logjams, Southwest wants, and needs, to add more clearing customers. But current customers say Southwest is fighting the opposite problem: Correspondent firms are leaving the fold.

The most significant departure was

Archipelago

, the Chicago-based electronic communications network, or ECN, in which Southwest owns a 1% stake. The ECN accounted for almost half of Southwest's trading volume, and, according to one Southwest customer who requested anonymity, essentially clogged the system.

Once Archipelago left, the new back-office system stopped failing almost on a daily basis, the customer says. Glatstein says the firm was happy for Archipelago to leave because it received a cut rate. Other firms that have left in the last year include

All-Tech Investment Group

, All-Tech says.

Fed Up

Despite the improvements, the Southwest customer says he's fed up with the inexperienced staff and his inability to reach his margin clerk. He's meeting with other clearing firms looking for lower margin rates and broader research.

Other correspondents complained of their customer accounts being wrong largely because of Southwest's system conflicts. And while some say those problems have cleared up, others say new ones have popped up. For example, account holders recently got word on their May 1 statements that bond holdings had been posted twice, one customer says.

Glatstein says that some trades entered on one system weren't showing up on the other system because of a breakdown in the interface. When the company fixed that manually, some dividends were double counted.

It was this kind of problem that caught the NYSE's eye, Glatstein says. The NYSE was in for an annual examination when Southwest's systems had a glitch communicating data. The examiners stayed for a few extra weeks to monitor the progress and then left, he says. Swirling rumors of NYSE and

National Association of Securities Dealers

investigations are just that, he said, rumors.

Technical problems are something that any potential buyer will have to consider but likely won't be a deal killer, says Jeff Putterman, an analyst at Minneapolis brokerage

George K. Baum & Co.

, which has done no underwriting for Southwest and has a strong buy on the stock.

"I think it's something that a buyer would have to come to grips with, but I don't believe it's an insurmountable problem," says Putterman, adding that he expects Southwest to fetch $800 million to $900 million, or roughly $55 a share. The stock closed Tuesday at 41 1/8.

Daytrading Focus

Some of Southwest's growth and technology-related problems began about 18 months ago when it started focusing on the daytrading industry, three correspondents say. Southwest is believed to be the second-largest clearing firm for daytraders, behind

Spear Leeds & Kellogg

. Top customers include

Tradescape

and

Terra Nova Trading

, a daytrading firm started by Gerald Putnam, Archipelago's chief.

Those daytraders could end up a sticking point for Southwest's sale, especially since February, when the

Securities and Exchange Commission

said it was expanding its daytrading investigation to include clearing firms.

But Southwest's Glatstein doesn't think this will hold back potential buyers. "It's a growing business. Anybody who thinks it's going away has just lost his mind. These firms have developed very sophisticated technology, and the clearing cost for those customers is extremely low."

Southwest hopes that outsiders will want to plug customers into the firm and its new

Windows

-based clearing system. In addition to clearing, Southwest owns online brokerage

MyDiscountBroker.com

, a money management firm, a trust company, an online bank, a technology company and Nasdaq market-making operations. It wants to build up its capital-markets business and private-client group.

Milk Barn

Its cash cow has been incremental sales of its stake in

Knight/Trimark

(NITE)

. In the latest quarter, the sale of 1.2 million shares pushed earnings to $4.02 a share. Excluding the gain, earnings were $1.28, according to Putterman at George K. Baum. That gravy train is drying up: Putterman estimates the company has about 600,000 shares left that it can sell.

In the hunt for a partner, Southwest is said to have contacted large insurers including

MetLife

(MET) - Get Report

,

American International Group

(AIG) - Get Report

and

ING

(ING) - Get Report

.

Wells Fargo

(WFC) - Get Report

is also on the list. They all declined to comment.

Glatstein says Southwest wanted to target the insurance sector. But since hiring Bear, Glatstein says the search has expanded to include credit card companies and lenders. In the next week or so, Glatstein says, Southwest will begin meeting with prospective buyers. So far, Southwest has sent out books and signed about 15 confidentiality agreements with potential suitors.

That's when the buyer's due diligence starts.