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January 1, 2003

Comeback Kid in Direct Access?

By Peter Chapman

Also in this article

A Canadian Vendor Joins the U.S. Club

There's a cold wind blowing in from Canada and it's not Mother Nature.

Toronto's Belzberg Technologies plans to leverage its newly acquired membership in the National Securities Clearing Corporation and the New York Stock Exchange to ratchet up the competition in direct access.

After knocking at the doors of those institutions for a year, Belzberg's U.S. broker dealer subsidiary was finally admitted last fall.

The double wins enable Belzberg's Electronic Brokerage Systems to self-clear and execute its own orders. That is expected to translate into lower costs and higher revenues.

Costs go down because Belzberg doesn't have to pay other brokers to clear its trades and execute its NYSE orders. Revenues go up, according to the firm, because many potential customers delayed signing contracts pending the approval of its applications. The prospective clients hope to negotiate a better deal for themselves.

Bottom Line

Any improvement in Belzberg's bottom line will be welcome. The publicly-traded firm has grown its revenues rapidly over the years, but it has also done the same with its expenses. It has lost money in each of the five years between 1997 and 2001 and was expected to do so again last year.

Belzberg's game plan is to compete as the low-cost provider of direct access to equity and derivatives markets. The connectivity shop supplies traders with order management systems, trading applications and order routing to several of the world's stock exchanges and U.S. derivatives marts.

The upstart Belzberg is gunning for such name-brand rivals as ITG, Instinet, Bloomberg Tradebook and NYFIX.

"We are able to aggressively compete at this point," said chief executive Sid Belzberg. "Now that we're members of the NSCC and NYSE we can eliminate all those expenses. We're busy ramping up to get everyone switched over. We have a lot of business that was pending those memberships."

Membership in these two august Wall Street institutions is a clear sign that Belzberg has arrived. Over the past three years, since the establishment of Electronic Brokerage Systems, Belzberg has been transforming itself from a software and network vendor into a stock brokerage. The endgame is to charge customers per transaction rather than a monthly licensing fee.

Today, transaction fees account for about two-thirds of Belzberg's total revenues. That's up from zero in 1998. Belzberg predicts that figure will go up to 99 percent in the next few years. Why the switch? "Licensing fees that service our products weren't as profitable," Belzberg said simply. Licensing fees now comprise most of the remaining one-third of revenues.

On the surface, Belzberg resembles a smaller version of the U.S. vendor NYFIX which supplies large brokerages with order management systems and connectivity to the NYSE. Belzberg does the same thing in Canada: It provides large brokerages with order management systems and connectivity to the Toronto Stock Exchange.

Transaction Scheme

It has no plans to switch its TSE-dealing Canadian customers over to transaction-based billing. They are already members of the TSE, trade in large volumes and have alternatives to Belzberg. They would pay more on a per-transaction basis.