Bid for New Customers Behind ConvergEx’s Buying Spree

The close on Monday of ConvergEx’s purchase of NYFIX U.S. Transaction Services highlights a flurry of acquisitions for the agency brokerage and technology firm.

After two years of silence on the acquisition front, ConvergEx bought a handful of businesses over a 46-day span this past autumn in an effort to bring in new clients.

ConvergEx on Oct. 8 agreed to buy Cogent Consulting, a commission management business; on Nov. 9 agreed to buy NYFIX’s U.S. Transaction Services, which include Millennium, a dark pool that caters to the sellside; and on Nov. 23 agreed to buy NorthPoint Trading Partners, a boutique prime brokerage. While the first two acquisitions expand existing ConvergEx product offerings, NorthPoint adds a new business line altogether.

All three introduce new technology, something on which the firm is particularly focused, said Joseph Velli, the chairman and chief executive of ConvergEx Group. The firm has two core businesses: investment technology services and execution solutions. And the three acquisitions fit ConvergEx’s goal to build out its technology offering, Velli added.

"We’re pretty excited," he said. "All three help to expand our business model, especially by bringing in new technology. And both of our businesses are very reliant on technology."

ConvergEx’s last acquisition occurred in July 2007. It bought LiquidPoint, a provider of execution management technology and brokerage services for listed options, which is run by Tony Saliba.

ConvergEx plans to incorporate the staffs of all three firms; there are no redundancies, Velli said. The firm purchased Millennium for $5 million in cash. Cogent and NorthPoint were purchased for cash and stock. ConvergEx would not disclose the price tag for either one.

On the commission management front, the Cogent purchase lets ConvergEx add products to fill out its offering. These products include technology for the broker vote, the allocation and reporting of the commission spend and for payments.

ConvergEx can now access Cogent’s "hundreds" of broker participants. And ConvergEx can also cross-sell into Cogent’s client base of large money managers, said John Meserve, chief executive of Westminster Research Associates, a member of BNY ConvergEx Group.

The NYFIX purchase, through the Millennium ATS component, opens ConvergEx up to sellside liquidity. And it taps a customer segment Velli said ConvergEx is keen to develop.

Millennium is the firm’s third in-house dark pool. It operates independently alongside ConvergEx’s streaming ATS for institutions, VortEx, and its dark block-trading platform, ConvergEx Cross.

One competitor in the ATS space said he didn’t know of ConvergEx’s plans for the acquisition. But he thinks ConvergEx would benefit if it lets Millennium and VortEx connect to one another. "When your customers come in," he said, "the more liquidity you have the better chance you’re going to have to get a match before you have to send [the order] away."

Sang Lee, a managing partner with Aite Group, agreed. Whenever a brokerage firm launches or adds another non-displayed pool, he said, it augments its overall execution management capabilities. "As much as you can, you’re trying to provide more options for your client base," Lee said. "From an agency broker perspective, it’s probably more important today than ever."

ConvergEx’s algos and smart routers will first attempt to execute an order within its in-house ATSs, Velli said. If no match is found, it will then be routed out to the marketplace.

As ConvergEx brings Millennium online, Velli said that the firm will build in various "policing mechanisms" to ensure that clients trade with the type of counterparties with whom that they want to trade. But he didn’t elaborate on which counterparties wouldn’t be allowed into Millennium.

Velli expects Millennium to greatly increase the firm’s dark pools volumes. VortEx traded an average of 10 million shares a day in November, single-counted, Velli said. That’s up from the 9.6 it traded in October, according to the most recent dark pool numbers assembled by Rosenblatt Securities. ConvergEx does not report monthly volume numbers for ConvergEx Cross.

For its part, NYFIX Millennium executed on average 16 million shares a day, single-counted, in October. It had been averaging just under that amount since August, Rosenblatt figured showed. But Millennium numbers had been falling from those of a year ago. It averaged 27.1 million shares a day, single-counted, in October 2008–a year-over-year drop of more than 41 percent.

ConvergEx will eventually review its dark pools’ technology, customer base and the order flow, Velli said. In 12 to 18 months, it may elect to combine one or two of them.

Finally, Velli considers NorthPoint to be a natural expansion of ConvergEx’s business model. Now that ConvergEx has established execution and technology relationships with many large hedge funds, he added, it will leverage the expertise it’s gained to offer high-touch services to smaller hedge funds.

NorthPoint serviced small hedge funds, typically those with less than $50 million in assets under management, a segment of the market Velli said is growing rapidly. Those firms can use ConvergEx’s other services, such as agency execution and commission management.

Aite’s Lee said the acquisition made sense for ConvergEx. "Everybody wants a more robust prime brokerage operation," he said. "In today’s market, the electronic trading piece goes hand-in-hand with a robust prime brokerage operation."