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June 4, 2007

ESP's Cost-Saving Service Attracts New Investors

Custodial Ticket Blizzard Gets Frosty Response from Investors

By Melanie Wold

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Three sellside firms are betting that virtual clearing brokerage Electronic Specialist (ESP) has the key to cutting costs for the buyside with its aggregated trade allocation and settlement service. Credit Suisse, Bear Stearns and Susquehanna International Group have invested an undisclosed amount in ESP, an institutional broker and technology provider. The firm's claim to fame is that it streamlines workflow by offering buyside users a single, aggregated custodial ticket for multiple trades with its central counterparty clearing services.

ESP officials declined to offer specifics about the transaction, as did the three investors. David Sher, managing director and a co-founder of ESP, says the new investors give ESP a shot in the arm toward its expansion goals. Most of the proceeds will go to continued development of its product. The balance goes to an early "angel" investor. The firm would also consider other investors, he adds.

Productivity Tool

Customers are very focused on lower costs these days," says Amir Goldman, one of the investors and a managing director at Susquehanna's private equity arm. Susquehanna views its stake purely as a financial investment. Goldman anticipates additional growth at ESP because its offerings make the trading process more efficient. ESP does not have its own front end. It plugs into front ends.

"It's a high-productivity tool," says Manny Santayana, managing director and head of Credit Suisse's AES sales. "It's all about high productivity and cost cutting." Santayana says clients find ESP's offerings attractive on three levels. First, it has the benefits of aggregating algorithms from various brokers on the front end; second, on the back end, all the various trades done throughout the day can be rolled up into a single custodial ticket, which offers the buyside's pension fund clients huge savings; and third, ESP provides plug-and-play FIX connectivity that can get hedge funds and smaller asset managers up and running quickly. It's a way for these firms to outsource their FIX services, Santayana says.

"Clients can aggregate the entire trade, regardless if they trade with the block or program trading desk," Santayana says. "ESP is the single clearing counterparty." Indeed, asset managers seeking best execution from an increasing number of venues can create a blizzard of tickets, and this has prompted software vendors to create some unique solutions.

Because of the fragmentation of the market into multiple exchanges, electronic communications networks, dark pools and other alternative trading venues, an active asset manager may have to deal with many brokers and venues each day. This creates multiple deal tickets, each of which adds to the costs of trading for the clients of institutional money managers.

Pension funds were finding that their custodial charges had risen roughly fivefold, one knowledgeable source says. It was impossible to avoid, because the number of custodial tickets had to rise in lockstep with the increased number of trades.

One solution lies in consolidating all the deal tickets into one custodial ticket. Vendors in this space include New York-based ESP, Boston-based Firefly Capital and Los Angeles-based agency brokerage UNX.

ESP's Sher says the idea for consolidating trade tickets was a creative solution that came from listening to the buyside. "The fragmentation of equities markets and proliferation of algorithmic trading and dark pools of liquidity led to costly increases in the amount of back-office processing," Sher says.

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