The London International Financial Futures and Options Exchange (LIFFE) for the first time has decided to market its LIFFE CONNECT software-which it has used to automate its own exchange-to exchanges worldwide.
To further that goal, LIFFE plans to call on Cap Gemini Ernst & Young-global networking specialists-to deal with any technical problems associated with implementing LIFFE CONNECT in other exchanges. In addition, LIFFE is partnering with the Blackstone Group---a private investment banking firm--and Battery Ventures---a venture capital firm---to obtain the financing, marketing and industry connections needed to lease and maintain LIFFE CONNECT on a global scale.
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 the 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 that customers can select from. Service from a basic matching engine to back-end matching and clearing to completely running a derivatives market for an exchange will all be available. 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.
"Taking something to marketplace that has to stand up to the rigors of considerably higher volumes and a commercial environment is something completely unique. So 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 systems," says Alex Woodhouse, director of e-financial services for Cap Gemini Ernst & Young U.K. He adds that the financial dynamics of the Cap Gemini-LIFFE relationship have not been finalized, "we have not gone through the necessary negotiations to understand how that might work," says Woodhouse.
General Partner of Battery Ventures Oliver Curme says the fact that there are 77 futures and derivatives exchanges worldwide-only two of which are automated-made investing in LIFFE perfect sense. "They (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's 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 establishing partnerships, helping the company formulate strategic partnerships, helping the company with financing, and helping with an IPO down the road," says Chu. Chu adds that by adding the technical knowledge of Cap Gemini to the team, LIFFE made Blackstone more comfortable with forming an alliance.
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, they (LIFFE) need 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." Woodhouse agrees, "the marketplace at the moment for IT staff is tough. LIFFE was struggling against a pure game of numbers to support themselves."
The infusion of IT personnel is being complimented by up to $91 million that Battery and Blackstone have committed to the deal. "It's a somewhat complicated deal but we'll end up with between 25 and 38 percent of LIFFE following that transaction," says Curme
LIFFE will market the CONNECT software-which it developed in-house for what Curme says was around $100 million-as an application service provider (ASP). "LIFFE will set up data centers, will run the software and then instead of getting a million dollars or ten million dollars up front, they'll get a nickel a transactions 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 so unique and valuable because trading futures is 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. According to Curme, "it's all built into the software."
Chu adds, "It's Battery's and Blackstone's vision that all exchanges will need to modernize by converting to the electronic platform and we believe that with LIFFE CONNECT our technical base is very well positioned to capitalize on that trend which is inevitable."