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November 1, 2003

Brut's Bigger Nasdaq Bite

By Editorial Staff

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What a difference a deal makes. Brut, a one-time also-ran in the ECN game, has pushed its way into the upper echelons of Nasdaq trading since its acquisition last year by SunGard Data Systems. Aggressive pricing, technology upgrades, customer diversification, corporate synergies and a critical legal maneuver have all combined to double its market share.

Long stalled at about four percent, Brut has watched its share of Nasdaq trading rise to ten percent since the August 2002 deal. The ECN is gaining fast on market leaders Instinet and Archipelago - each with about 25 percent of the market - and on Nasdaq's own SuperMontage which has 16 percent.

As Nasdaq trading devolves into an oligopoly of electronic order books competing on price, Brut is leading the way. In August, the ECN cut its hit-or-take rate - the price it charges traders to remove liquidity from its book - from the industry standard 30 cents per hundred shares to 27 cents.

Helping to make the cut possible was a decision by Brut to switch the reporting of most of its trades to the Cincinnati Stock Exchange and away from Nasdaq. Under the CSE's Specialists Operating Revenue (SOR) plan, Brut is entitled to share in the Cincinnati's revenues - most of which derive from sales of market data.

Brut wants to be known as the low-cost alternative. So it supports a new Nasdaq proposal to cap ECN access fees at 30 cents per 100 shares. Brut now charges non-subscribers 50 cents per hundred shares.

It hasn't all been roses under SunGard. A plan to involve SunGard's brokerage unit in the marketing of Brut to the buyside has been a bust. But, by and large, the acquisition has made the 58-employee organization a bona fide contender in the ECN sweepstakes.

Technology editor Peter Chapman sat down with Brut president Brian Hyndman, and chief operating officer Bill O'Brien, to discuss the up-and-comer's strategy and the current Nasdaq proposal.

Traders: Why has the SunGard buyout made such a difference?

O'Brien: Previously, we were concentrated in the market maker community, especially with those using the BRASS/UMA technology. [Those offerings were] undergoing cost and execution quality pressures brought on by such players as Lava and RoyalBlue. We really needed to diversify [our customer base] and offer a more compelling economic proposition.

Traders: SunGard made that possible?

O'Brien: Right. We really needed the benefits of one committed partner. Instead of the consortium-based structure we had. Until SunGard bought us, we were owned by 25 different firms, SunGard being the biggest. But because they were the largest and because they were already providing some technology services to us, it really was a natural fit.

Traders: SunGard invested in Brut?

O'Brien: We totally overhauled our technology. SunGard sunk about $4 million into our technology. We upgraded our hardware to top of the line Sun servers. We worked with Sun [Microsystems] to modify our software. To move key components from a 32-bit platform to a 64-bit platform. Those changes gave use greatly increased capacity. Quintuppled it. Before we could process no more than two million orders per day. Now our limit is 11 million.

Traders: Order capacity is more relevant than share volume?