LIFFE to Market LIFFE CONNECT to Exchanges Worldwide

The London International Financial Futures and Options Exchange (LIFFE) for the first time has decided to market its LIFFE CONNECT software-which it used to automate its own exchange-to exchanges worldwide. To further that goal, LIFFE has formed an alliance which includes a partnership with Cap Gemini Ernst & Young-global networkingspecialists-to remedy any technical problems associated with implementing LIFFE CONNECT in other exchanges. The Blackstone Group--a private investment banking firm and Battery Ventures--a venture capital firm--are also part of the alliance. They will provide the financing and handle marketing and industry connections needed to lease and maintain LIFFE CONNECT on a global scale.

LIFFE will market the CONNECT software, which it developed in-house for what General Partner of Battery Ventures Oliver Curme says was around $100 million, as an application service provider (ASP). "LIFFE will set up data centers, run the software and then instead of getting a million dollars or ten million dollars up front, they'll get a nickel a transaction or something along those lines. So they'll get paid per use on a frequency basis," explains Curme.

Curme says the LIFFE CONNECT software is valuable because trading futures is a complicated business, the most complicated part of which is understanding and coping with regulatory oversight issues. But with LIFFE CONNECT that should all be taken care of, as according to Curme, "it's all built into the software." LIFFE decided to strike a partnership as it felt marketing and customizing CONNECT would be a difficult venture to handle on its own. Hugh Freedberg, chief executive of LIFFE, says, "For us to be able to develop and run the technology for ourselves is one thing. But, obviously, to be able to do that and provide it to other businesses requires the help of organizations that have strong leadership positions in the global technology market and have a very deep understanding of the e-business market." Freedberg says that LIFFE CONNECT will be marketed as a menu of services from which customers can select. Services could range from a basic matching engine to matching and clearing or even to completely running a derivatives market for an exchange. Freedberg claims LIFFE CONNECT faces no competition in the marketplace and expects to sign its first users other than the LIFFE exchange in the next six to nine months.

Alex Woodhouse, director of e-financial services for Cap Gemini Ernst & Young U.K., adds, "Cap Gemini will be supplementing the IT division that exists within LIFFE with relevant resources that will cope with the enormous strain that's going to be put on the LIFFE CONNECT system." Curme says the fact that there are 77 futures and derivatives exchanges worldwide-only two of which are automated-made investing in the venture perfect sense. "LIFFE said to themselves, 'Look, we've made this giant leap forward, isn't there someone else in the industry who might be interested in going in this direction?' The answer is 'Yeah, there are 75 other futures exchanges that would like to go in that direction.'" But an infusion of capital is not the only thing that Battery is bringing to the table. "We're investing in LIFFE, we're taking two seats on their board, and we'll be helping them actively as they develop this business," adds Curme.

Chinh Chu, senior managing director of the Blackstone Group described the relationship as "a corporate partnership with LIFFE, that entails a financial partner (Battery Ventures)." Chu also sees the LIFFE partnership as being much more than just about money. "We're going to be very helpful in a number of ways ... including helping the company formulate strategic partnerships, helping the company with financing, and helping with an IPO down the road," says Chu.

The addition of Cap Gemini to provide technical expertise was also important to Battery Ventures. Curme says, "They're going to add a lot of IT resources. Instead of just technology, LIFFE needs help in recruiting a new team for LIFFE CONNECT. They need help in doing strategic deals with other exchanges and they'll need help as they go forward and take the subsidiary public." The infusion of IT personnel is being complemented with up to $91 million that Battery and Blackstone have committed to the deal.