A-Team Insight: Cicada Acquisition Underpins Aggressive Chi-X Expansion into Global Exchange Systems Business

Originally appeared in MiFID Monitor

This week’s acquisition of Cicada Corp. by Instinet’s Chi-X unit sets the stage for a mouthwatering competitive battle in global exchange technology services, pitching the new European MTF’s and Cicada’s trading and market data capabilities against those of Nasdaq OMX and NYSE Euronext Advanced Trading Solutions. It also begs the question of why the London Stock Exchange – as one of the world’s dominant exchanges – has been so quiet in leveraging its not inconsiderable technology investments into a discrete exchange systems business.

Certainly, Cicada’s purchase by Chi-X Global, a new Instinet-owned holding company for all Chi-X activities, to create Chi-X Global Technology, brings the Nomura group instantly into the global exchange systems business. Chi-X Global Technology, to be headed by Cicada CEO Greg Smith, will leverage both Chi-X’s successful next-generation electronic trading platform and Cicada’s range of data management and low-latency distribution technologies and commercial expertise to offer a full-service exchange platform offering.

Terms of the deal – including price – weren’t disclosed. But Chi-X will acquire “substantially all” the business and assets of Cicada Corp., including its new MarketPrizm low-latency market data and connectivity platform and the Profiler customer qualification, compliance and reference data management offering.

As such, key Cicada executives, including executive vice president Hubert Holmes, Paris managing director Nicolas Levy and Hong Kong development centre chief Richard Leung remain in place (interestingly joined by Chi-X Europe COO Hirander Misra). A next-generation version of Cicada’s Composer market data platform, meanwhile, will be integrated with the core Chi-X trading platform, rather than operated in tandem, in order to minimize latency.

This offering will sit at the centre of the Chi-X Global Technology, which will be operated separately from Chi-X’s regional trading platforms. Smith points out that these Chi-X regional trading platforms – existing examples include Europe and Canada – will in effect become customers of Chi-X Global Technology.

Chi-X – and parents Instinet and Nomura – moved swiftly to acquire Cicada after discussions with potential exchange clients globally indicated a need for a comprehensive high-performance trading, connectivity and data management and distribution solution, according to Tony Mackay, CEO of Chi-X Global, who originally spun the successful Chi-X Europe MTF out of Instinet’s operations there (although the platform was developed in the U.S., as a next-generation development of Instinet’s Inet system, which was later sold to Nasdaq Stock Market).

Mackay says Chi-X has been talking to established and emerging exchanges and alternative trading platforms within all regions globally about creating the kind of low-cost high-performance trading and data systems required for today’s environment. By adding Cicada’s expertise, particularly in data management and low-latency distribution and the commercial development of both capabilities, to Chi-X trading platform and Instinet’s dark pool offerings, Chi-X Global Technology aims to offer a compelling solution for exchange operators that don’t have the resource or expertise to build their own.

According to Smith, the events of the past two years – driven in part by the high-performance requirements of the EU’s Markets in Financial Instruments Directive (MiFID) and the U.S. Regulation NMS – have obsoleted many of the trading platforms operated by exchanges globally. As such, he says, market participants will need to replace or upgrade their platforms over the next couple of years.

For Cicada, he says, this realization had led it to seek possible partnerships, including looking at potential private equity involvement. These discussions, he says, resulted in an introduction to Chi-X, specifically around the MarketPrizm low-latency distribution platform and later resulting in the deal to acquire. The deal was handled on Cicada’s side by Financial Technology Partners LP and its FTP Securities LLC affiliate.

Chi-X Global Technology will be pitched against Nasdaq OMX and NYSE Euronext Advanced Technology Solutions, both of which have been aggressive in marketing their own systems to new entrants globally. Ironically, Nasdaq acquired Instinet’s original trading platform, Inet, a few years ago, supplementing it with Cicada’s Composer market data offering as part of the Genium project (Electronic Trading, June 2008). The Genium project, though, is now in question following the departure of the core development team there.

NYSE Euronext, meanwhile, has pulled together an array of capabilities within the Advanced Technology Solutions line, based on the matching platform of the Archipelago ECN it acquired some years ago, combined with fellow acquisitions TransactTools and Wombat Financial Software.

Notwithstanding the competition for new exchange technology services business globally, the Cicada acquisition will strengthen Chi-X’s trading platform in Europe, where it faces a number of rival MTFs, among them Turquoise, Bats Europe and Nasdaq OMX, and dark pools like NYFIX Euromillennium, ITG and Liquidnet. Others – Equiduct, Burgundy to name just two – are set to join them, making it an increasingly crowded marketplace. With additional capabilities, like smart order routing to Chi-X/Instinet venues, broker dark pools, traditional exchanges and other MTFs, and Cicada’s low-latency and reference data management systems, Chi-X will be positioned to offer a more comprehensive solution than previously.