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September 12, 2006

BNY ConvergEx Eyes Hedge Funds with Eze Merger

By Peter Chapman

Two heads are better than one in winning hedge fund business.

That's the thinking behind the creation of BNY ConvergEx Group, the new agency brokerage formed by the merger of BNY Securities Group and Eze Castle Software.

By embedding BNY's DEX direct market access platform into Eze Castle's Traders Console order management system, BNY ConvergEx will create a knockout product that will appeal to electronically minded hedge funds, BNY ConvergEx executives believe. The combination of two software pieces will enable them to grab the trading business of funds looking for alternatives to prime brokers.

"It is rare that both organizations will benefit in the case of a merger," said Joe Velli, chairman and chief executive of BNY ConvergEx. "But in this case it was the driver."

Both organizations saw a merger as a way to grow their businesses, according to Velli. BNY, with a customer base tilted toward traditional money managers, wanted to make a bigger splash with hedge funds.

Eze Castle, which sells more order management systems to the largest hedge funds than any other vendor, needed to meet customer demands for more electronic trading. "Many of our clients have been demanding better integration across the investment and trading workflow," said Sean McLaughlin, founder of Eze Castle.

BNY Securities executives wanted to buy Eze, but the Bank of New York, BNY Securities' parent corporation, nixed that idea. The investment would depress BNY Securities' return on capital. The bank was upset about the trading group's returns, senior executives there told analysts recently

The solution was for the bank to spin off about two-thirds of its ownership in its execution business to the private equity firm GTCR Golder Rauner, Eze Castle's owners and BNY ConvergEx management. That reduced its capital commitment to the division, brought in $441 million in cash and allowed it to buy back stock. The bank now owns just 35.4 percent of BNY ConvergEx. GTCR also owns 35.4 percent of BNY ConvergEx and controls the board. BNY ConvergEx management owns 19.5 percent.

BNY ConvergEx management includes Velli, Kerry Pack, John Meserve, Anthony Blumberg, George Costafos and Charlie Raphold from BNY. The trading grossed $297 million last year. Tom Gavin, David Quinlan and Jeff Shoreman make up the Eze contingent. The vendor grossed $43 million last year. Much of that is recurring or commission-like coming from routing orders to brokers. Goldman Sachs, previously a large owner of Eze Castle, does not have a stake in BNY ConvergEx. Operations will be split between New York and Boston, Eze's current headquarters. The deal is expected to close this year.

BNY gets half its business the old-fashioned way with broker-assisted trading services. The other half comes from electronic trading services to buyside do-it-yourselfers. Velli predicts both sides of business will grow under BNY ConvergEx.

BNY ConvergEx's first task is to embed DEX into Traders Console, according to Velli. The merger does not mean that other brokers will not be able to integrate their DMA platforms into Traders Console, but DEX will become the default DMA platform. As it is "embedded" and not simply "integrated" into Traders Console, Velli said, it will be easier to use than other platforms.

The new shop also plans to embed other electronic features into Traders Console including a dark book crossing system, transaction cost analysis software and a research house rating system from its Jaywalk unit.

"ConvergEx" refers to the convergence of DMA and OMS technologies. The deal though is not the first of its kind. Last year, agency brokerage ITG bought buyside order management systems vendor Macgregor.