Coming to America: NeoNet Eyes Indirect Passageway to Nasdaq, NYSE

For the last five years, Stockholm, Sweden-based NeoNet -- a front-end workstation software vendor specializing in electronic exchange access -- has been completely focused on Europe. Starting in its home country, NeoNet gradually built direct interfaces to the electronic order books of just about every major European stock exchange, including markets based inStockholm, London, Frankfurt, Helsinki, Copenhagen, and, most recently --via an agreement it recently struck with the pan-European market Euronext -- Paris, Amsterdam and Brussels.

But by mid-2002, NeoNet plans to begin its pursuit of a new market: Nasdaq. Moreover, sometime in 2003, it will try to penetrate the U.S.-listed equities market by providing an electronic link to the New York Stock Exchange. However, while NeoNet intends to target its U.S. equity markets functionality at its core audience of institutional investors and broker/dealers, the vendor's strategies for Europe and the U.S. will be radically different. In Europe, NeoNet holds a membership on each exchange it is linked to, and clients of the vendor are equipped with direct connectivity to the electronic order books of exchanges. In the United States, on the other hand, NeoNet intends to provide indirect access to the Nasdaq and NYSE, via third-party vendors.

Indeed, to that end, NeoNet has already signed a deal with Brut, an electronic communications network (ECN) that primarily matches buy and sell orders for Nasdaq stocks. Torvald Bohlin, NeoNet's chief executive officer, says that once the link to Brut is in place, clients of NeoNet will be able to route orders directly to the matching engine of the ECN, which will then either match the order internally or reroute it to another Nasdaq execution destination. NeoNet, which expects to complete its interface to Brut by the second quarter of next year, believes the indirect approach is the best way to penetrate the U.S. market. "For Nasdaq stocks, there are a number of electronic order books that are commercially driven and competitive. So there is actually no need for us to connect directly (to the stock market), as long as we connect to an ECN that is big enough," says Bohlin.

However, Sang Lee, an analyst covering e-trading at research and consulting firm Celent Communications, questions NeoNet's choice of Brut and is skeptical about the vendor's odds of succeeding in the United States. "I'm not really convinced that, given a choice, a firm would try to funnel their orders through NeoNet to (potentially) get matched at Brut," says Lee, emphasizing that there are already a large number of U.S. order management systems that provide access to multiple Nasdaq liquidity pools. "Whenever you go after liquidity, you have to go full out .... So if (NeoNet) wants to go through any ECN, perhaps they should hook up with a larger player, like Instinet or Island." To have a shot at success in the United States, says Lee, NeoNet must expand by linking with the largest pools of liquidity. On the Nasdaq side, one way to accomplish that is to form alliances with multiple ECNs. However, while asserting that NeoNet will possess the technology capability to "pretty easily" connect to other ECNs, Bohlin says the vendor is not currently holding talks with any other networks. Linkages to other ECNs, he says, will be driven by customer demand.

Similarly, NeoNet will also lean on its clients when it finally decides which third-party vendor it will partner with to connect to the NYSE. While declining to specify the companies being considered for NYSE access, Bohlin says the vendor that is ultimately selected may also provide NeoNet's customers with connectivity to the American Stock Exchange and Philadelphia Stock Exchange. Bohlin also explains that NeoNet's direct approach in Europe makes sense, because European equity exchanges, which are driven by electronic order books, are much more automated than their American counterparts. In fact, he says, the order books of European exchanges operate in a very similar manner to Nasdaq ECNs.

NeoNet, which also plans to develop connectivity to the Milan Stock Exchange and the pan-European virt-x market by the end of next year, will provide its customer with electronic access to roughly 80 percent of the world's stock market capitalization after it finishes its indirect interface to the NYSE in 2003, says Bohlin. Today, he says, NeoNet already provides access to 80 percent of Europe's stock market capitalization.

On average, says Bohlin, NeoNet executes $220 million worth of stock trades per day -- a figure that represents a 300 percent growth rate from 1999.