Would-Be ECN Buyers Are Looking to Strike First - TheStreet

Would-Be ECN Buyers Are Looking to Strike First

A wave of consolidation could easily sweep the electronic trading arena in coming months.
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Even the wallflowers are dancing in the business of electronic stock trading.

Strike Technologies

, one of the smaller of the nine electronic trading systems storming Wall Street, is no exception. Arthur Pacheco, Strike's president and chief executive, says the company has been approached about possible mergers by, among others, competitor

Brut

, also known as

Brass Utility

.

"We are entertaining overtures from four sources," Pacheco says. "I'm looking at all of them." But, he says, not all the overtures are in writing and none has gone to the company's board. "As of right now, nobody is buying us," he continues.

Strike is just one of many targets. In the past few months, ECNs have partnered up or gotten strategic investments from major securities firms such as

Goldman Sachs

(GS) - Get Report

and even

trading-system rivals. ECNs are looking for backers to bring them more order flow because, with consolidation of these trading systems on the horizon, ECNs need that liquidity to survive.

In addition, Arthur Levitt, the

Securities and Exchange Commission

chairman, has laid out some changes he'd like to see in market structure that would benefit ECNs by allowing them to trade

New York Stock Exchange

-listed stocks but also could hurt them by pressuring commissions.

As for an imminent Brut-Strike deal, Pacheco says he hasn't even seen a term sheet from Brut, although he has seen two from other bidders. (Pacheco declined to identify the three other suitors. In the past, people in the industry have said that the NYSE has approached Strike.) Pacheco says Brut first approached Strike a year and a half ago.

Brut and the NYSE declined to comment.

Talk in the small ECN world about Brut and Strike linking up has certainly accelerated. According to one person familiar with the offer, Brut would buy Strike, with money changing hands. What's holding up the deal, another person close to the deal speculates, is that Strike has more than 25 shareholders and partners, while Brut has its own opinionated backers. As a result, a deal between the two isn't likely to be easily nailed down.

Brut is majority owned by

Automated Securities Clearance

, a unit of

SunGard Data Systems

(SDS) - Get Report

, and began operating in April 1998.

Merrill Lynch

(MER)

,

Morgan Stanley Dean Witter

(MWD)

, Goldman Sachs and

Knight/Trimark

(NITE)

hold minority stakes in the company.

Nasdaq

data from August put Brut as the sixth-largest ECN by volume and Strike at seventh.

Strike was launched by

Bear Stearns

(BSC)

in November 1998 and now includes shareholders like Nasdaq market maker

Herzog Heine Geduld

,

Bridge Trading

and

Salomon Smith Barney

, a

Citigroup

(C) - Get Report

unit.

One person familiar with Strike says its board members have discussed the Brut merger in concept and that Strike has gotten more attractive to suitors as word leaked out, prompting proposals from other ECNs as well. The NYSE isn't quite ready to leave the party alone, either, he says.

But while Brut may be lobbying for a deal and some shareholders appear to favor it, this person says, it's not a sure bet: Strike could go it alone or with a different trading system. "If Strike does something, it'll be for a strategic fit," he says.

Dan Burke, an analyst with

Gomez Advisors

, says a Strike-Brut combination makes sense. Strike has invested heavily in front-end technology, while Brut would bring more liquidity because of its links to Brass trading software.

"Brut on the surface has a lot of institutional power," Burke explains. But, he continues, "they just have the relationships. The volume number at Brut doesn't suggest that they're making a lot of headway." (Gomez Advisors declines to disclose its clients.)

While volume numbers for the ECNs are difficult to nail down because of different reporting methods,

Putnam Lovell de Guardiola & Thornton

estimates in its September electronic brokerage report that Strike trades about 5 million shares a day and Brut does about 8 million.

ECNs have grown rapidly in the past few years to nine from just

Instinet

, owned by

Reuters

(RTRSY)

, due to a change in Nasdaq Stock Market order-handling rules that requires broker dealers to seek so-called "best execution" for their customers. They now account for nearly 30% of Nasdaq stock trading, but less than 5% of listed stock trading.

These trading systems also have been at the front of the nascent after-hours trading market, jumping in with pre- and postmarket trading as the established stock exchanges struggle with regulatory bodies. Because none of these systems is an exchange yet --

Island

,

Archipelago

and

NexTrade

are applying for exchange status -- they are more lithe.

Brut, Strike and six other electronic trading systems announced recently that they had agreed to create links among their trading systems in order to improve the transparency and liquidity of that after-hours trading market. On Friday, NexTrade joined the consortium.