Blackwood Inc., the former direct-access brokerage firm, has filed for bankruptcy, and is now in the process of trying to re-create itself as a full-time technology vendor. Via its Chapter 11 filing, submitted on April 30, Blackwood effectively closed the doors on Blackwood Securities-- the NASD broker/dealer through which Blackwood signed up clients of its direct-access software. However, though a skeleton staff now runs it, Blackwood remains operational.
Through its bankruptcy filing, Blackwood has pulled itself permanently out of the brokerage business. But, rather than dropping out of the industry all together, Blackwood is now focusing all of its efforts on developing and licensing its direct-access software.
In an exclusive interview with WS&T Week, Craig Schlifstein, chief strategist and founder of Blackwood, says the vendor is now actively trying to sell its direct-access technology to variety of stock-market players, including online brokerages, clearing firms, institutional-trading desks, bank-processing firms and order-management system providers. "We're really going back to focus on what our core expertise is: developing and implementing (advanced) direct-access software. And instead of doing (that) via a brokerage model, we're using a technology model," Schlifstein explains.
The news of Blackwood's Chapter 11 filing came as a surprise to many people in the direct-access industry. Last year, Blackwood built an institutional version of its platform and made a major push into the buy-side community, in recognition of the fact that the economy was drying up the direct-access active day trader market. The firm -- which was trading a daily average of 27 million shares in January 2002 -- had also developed a solid-technology reputation.
What's more, a source at one of Blackwood's creditors says the firm talked positively about its future only one month ago. "They told us things were going well and clients were coming on board .... So we were kind of surprised to hear about this (Chapter 11) filing," says the source.
However, while asserting that Blackwood did pick up some buy-side clients last year, Schlifstein says the firm simply was not adding customers at a fast enough rate to maintain its financial viability. "In the beginning of 2001, we (had) 90 percent active day trading (clients) and 10 percent institutional. And by the end of 2001, those (numbers) were completely reversed," he says. "But we needed to bring on clients quicker ... (because) we were never a well-financed company."
Schlifstein, who describes the financial history of Blackwood as a "four-year-boot strap," says the buy side is definitely keen on adopting direct access -- it just takes longer to sell the technology to large institutions. Those long sale cycles, he says, put Blackwood in a "regrettable financial situation," but the firm tried to pull itself out of the abyss by holding merger and acquisition talks with multiple parties. "Blackwood had been engaged in a number of M&A conversations since last December, with one party in particular, but that did not work out," he says. He would not reveal with whom the talks were held.
Eventually, when Blackwood came to the conclusion it had no shot at reinventing itself via a merger, it informed its customers of its decision to file for bankruptcy, says Schlifstein. In early April, he says, Blackwood informed its customers and attempted to help them make a smooth transition to another trading platform. Most of Blackwood's clients, says Schlifstein, migrated to the institutional brokerage firm Jefferies & Co.
The Chapter 11 filing also forced Blackwood to make a migration of its own, from its old 40 Wall St. headquarters to its new 2 Recto St. office. The new digs, says Schlifstein, now house only five Blackwood employees -- a group he describes as the firm's core technology team. In addition to Schlifstein, that team includes Blackwood's chief technology officer, infrastructure director, office manager and training specialist.
Blackwood, which employed a staff of 45 last December, had three rounds of layoffs in 2002: one in January, one in March and one in late April. In addition to its layoffs and office move, Blackwood also had to temporarily shut down its Web site. A revamped version of the site, which will reflect Blackwood's new business model, should be up and running within a week, says Schlifstein.
With the help of its new software-licensing-business model, he says, Blackwood expects to fulfill all of its Chapter 11 financial obligations. "My number one responsibility, as an officer of the company and a director of the company, is a fiduciary responsibility to my creditors. Every move we make, first and foremost, has to be in their best interests," Schlifstein emphasizes.