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Trading Technology

11:31 PM
Larry Tabb
Larry Tabb
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Patent Litigation: Legalized Blood Sport

Am I nuts, or are today's patent litigation issues totally out of control? Since when does our industry allow technology vendors to take out method patents that curtail innovation and hold both firms and the global financial markets hostage?

Am I nuts, or are today's patent litigation issues totally out of control? Since when does our industry allow technology vendors to take out method patents that curtail innovation and hold both firms and the global financial markets hostage?

A few trading technology vendors have been using the judicial system to pummel each other and, by extension, the industry. ESpeed, BrokerTec, Trading Technologies, Reuters and Bloomberg are all hip-deep in this mess. Over the past six or seven years, eSpeed has sued virtually all the bond trading platforms (most recently BrokerTec) in regard to its inter-dealer broker fixed income trading capabilities. Reuters is suing Bloomberg over FX intellectual property infringements. And, most notoriously, Trading Technologies is suing eSpeed and others in a scheme to force the U.S. and, by extension, the global financial futures industry to pay Trading Technology 2.5 cents per futures contract in perpetuity. How can this be allowed to happen?

Method patents are U.S. patents that attempt to protect a systematized, documented process rather than the typical product. They were developed to protect intellectual property around decoding the human genome, recognizing that allowing previous accomplishments to be copied could eliminate the financial incentive to make the investment in development in the first place.

But is the process of decoding the human genome comparable to trading processes that have progressed over the course of hundreds if not thousands of years?

Sure, these firms codified methods and applications and, maybe, (with healthy skepticism) added a little creativity. But does that entitle them to hold an industry hostage? What happened to developing a good product, pricing it at an acceptable level, providing wonderful client support and building a lasting business? Don't these business practices matter anymore? What's next, suing equity ECNs, OMSs and execution management systems for showing depth of book or for providing an integrated electronic trading platform - something that the equity markets have been doing for a lot longer than five years?

Now, eSpeed appears to be on the losing side of both the Trading Technologies and the BrokerTec lawsuits, so at least one of these issues looks dead. However, the more troubling issue is Trading Technologies' push for a perpetual cut of the futures exchanges' income.

The industry cannot sanction this. It is not in the best interest of the industry or investors to lock in a flat tax of 2.5 cents per contact in perpetuity and proffered to a vendor whose notable accomplishment was to apply for a patent and aggressively defend it. Not only is it anticompetitive, it does not take into consideration the efficiencies that have occurred in other markets where price competition has caused matching prices to drop to the benefit of individual and institutional investors alike.

Generally, I am not in the tort reform camp, but this is a trend that the industry must stop. We need to clarify the distinction between patentable methods and processes based on unique, ingenious and truly outside-the-box advances and obvious advances that rely on existing thought. Otherwise, we will find ourselves in a nightmare of legal quandaries and extortion that will take our eyes off what really matters - making the best investments and providing the best service for our customers.

Since I copyright my writing, perhaps I should be the last to talk. But there is a clear difference between protecting original thoughts put to paper and patenting the process of writing. One way, I protect my original thoughts, put them into the market of ideas and enhance the level of debate; the other way, I stifle creativity as I collect my tax on each and every written word.

Larry Tabb is founder and CEO of Westborough, Mass.-based The Tabb Group, a financial-markets strategic-advisory firm. [email protected]

Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio
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