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September 22, 2005

J.P. Morgan's DMA Push: The Neovest Deal

By Nina Mehta

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Independent direct market access may have a short-lived history. Not because the business doesn't have legs but because it's been successful. For several years, Wall Street brokerages have watched DMA providers capture order flow as buyside traders sought greater control over their orders and cheap, anonymous executions. Not surprisingly, the brokerages didn't sit idly by. Those not already chasing electronic flow rushed into acquisition mode: Citigroup acquired Lava Trading, and, last year, Bank of New York bought Sonic Financial Technologies.

Now it's J.P. Morgan's turn. In June the broker-dealer announced it would purchase

privately held Neovest Holdings, an Orem, Utah-based DMA provider and order routing platform, from a group of investors led by CCP Equity Partners.

Neovest will be run as a wholly owned subsidiary. It adds approximately 150 clients, a majority of which are hedge funds, according to a spokesman for J.P. Morgan.

Neovest is known for strong technical analytics, including real-time charting, news and extensive filtering capabilities, as well as advanced order management functionality.

"Large broker-dealers feel they need to be in the DMA game," says Harrell Smith, manager of the securities and investments practice at Celent Communications. "J.P. Morgan recognized that it's easier to buy an established player that already has established clients and has been up and running for a while than it is to go through the pain and cost of building a platform itself."

Pushing Algos

For J.P. Morgan the advantage is clear. The broker-dealer gains a front end that will help it distribute its algorithmic trading tools and execution analytics to clients. This will augment its order flow, which will help offset declining commissions from traditional brokerage activity, enabling it to compete more aggressively with other bulge-bracket firms.

"We expect a meaningful percentage of our DMA activity to come through the Neovest front end, and by the end of 2006 we hope to grow that globally," says Emily Portney, managing director and COO of origination and distribution for the Americas at J.P. Morgan.

Significantly, the Neovest acquisition extends J.P. Morgan's reach into hedge funds, the fastest-growing source of order flow on the buyside. Owning its own front end also gives the broker-dealer greater maneuverability. "We can control how we distribute our content, how fast we can do it, and how seamlessly we can integrate the trading tools we're providing to clients with their existing workflows," Portney says.

J.P. Morgan has been a sponsoring broker of Neovest's platform since last fall. The broker-dealer's algorithmic and execution tools will continue to be available on other execution platforms, and on buyside OMSs.

For Neovest, J.P. Morgan's appeal lies in its deep pockets. J.P. Morgan's resources will allow the DMA provider to expand its offerings across asset classes and globally to include global equities, futures and options. "However long it would have taken Neovest to do this alone, we're going to cut that time in half or better by merging," says Tom Van Riper, the firm's COO.

Neovest, for its part, will remain a broker-neutral platform, offering hedge fund and other clients algorithms from a number of sellside partners.

Morgan's Catchup