Waters Wrap: Pico, Redline, & the shrinking mid-market, market data tech space

After pairings of the Options-Activ, Exegy-Vela, and now Pico-Redline, Anthony wonders whether the next wave of consolidation will involve the biggest tech and market data players.

Before we get to Pico’s acquisition of Redline Trading Solutions, I wanted to give an update about WatersTechnology as we enter the New Year. If you’re not a subscriber and are illegally reading a copy of this column that someone sent you, just skip down to the next section.

We have three notable changes ahead of us. First, you might’ve noticed that we published fewer stories in 2021 than we have in the past. Our thinking was, and is, that our readers want quality over quantity, and quality takes a bit more time to produce. Take, for example, this nearly 5,000-word feature by Max Bowie on the state of market data platforms—it took about three months and lots and lots of interviews to piece together. Or when we broke the news that Citi and Bank of America were building a new multi-bank CLO platform called “Octopus.” Or that Ion had acquired Dash. In all cases, we had to drop everything and focus on nailing down the facts. We hope you’d agree that good journalism takes time and resources, but we also know you pay a lot of money for a subscription—so we have to publish stories that provide value, or else you’ll cancel your subscriptions, I’ll get laid off, and the White Horse Tavern on Bridge Street will go out of business without my forking over half my paychecks to Tommy, Ursula, Anita and Corinne.

In 2022, I anticipate we will publish slightly fewer stories than in 2021, but that we will be writing deeper and more investigative pieces that (we hope) will keep you informed, help you to do your job more effectively, and aid in your strategy and decision-making processes. If you are a subscriber and are not satisfied with our product, please don’t hesitate to reach out and let me know (anthony.malakian@infopro-digital.com), but I think you’re going to like what we have on the docket this year.

That leads me to our second change. As some of you know, we publish a glossy, monthly magazine. This year, we will be switching to a quarterly magazine. This is NOT a sign of weakness—our subscriptions have gone up year on year, and that makes up the majority of our revenue.

We are doing this for two reasons. First is a quality concern. Every month we have published a 40-page (at least) magazine, but there were times we forced stories in due to deadlines or to simply fill out the book. Now, each quarter, you’ll get a thicker issue that contains the very best of our content from the previous three months. The product’s quality will be better—which is at the heart of everything I’ve tried to do here since taking over as editor-in-chief. Second, despite the fact that I’m a dirty registered Republican, there are conservatives that believe in conservation and sustainability (see: Dick Nixon and the OG George Bush). When we conduct reader surveys, we find that almost all of you read us on your computer or mobile device, while there are only a handful of subscribers that regularly read the print edition. Again, we are not taking away the magazine; it just seems responsible to be more efficient in how we deliver our content.

Finally, this third “change” is not guaranteed. A lot of you have been asking me whether or not we’ll finally have live events in 2022—the answer is, we certainly hope so! Toward the end of last year, we had a couple small gatherings in New York and London. The Omicron variant has dampened some of the optimism we had toward the end of last year, but (and I am simply speaking for myself and not for anyone else associated with WatersTechnology) I think more people are realizing that Covid will be a part of our lives for the foreseeable future, so we need to figure out ways to work and connect similarly to what we did pre-2020, even if not in exactly the same ways. But online-only events are not the way forward.

That’s the State of the Union for WatersTechnology. If you have any questions, don’t hesitate to ask.

Pico, Redline, and a consolidating market

Earlier this week, Pico announced that it had acquired Redline Trading Solutions for an undisclosed amount. It’s not the kind of news that will make the mainstream headlines, but we’re pretty hardcore about this stuff.

To me it represents the last pawn to fall following the pairings of Exegy-Vela and Options-Activ last year. As Max Bowie, who has been covering this space for two decades, noted in that Options-Activ story, the middle market for market data technology companies was once a crowded space, but M&A activity has ramped up as these smaller firms have realized they can better fend off rivals and take on bigger competitors by joining forces. Low latency isn’t reserved for just a few specialist players anymore; it’s been table stakes for a long time.

Here’s how I see the state of things, and it’s all conjecture—so please do let me know if you disagree. I don’t think these acquisitions are really about adding capabilities or functionality (but I’m not solid in that opinion). Let me explain.

I think it’s about consolidating the space, and opportunistically picking off what competition still exists, while the founders are in a mood to sell. For example, if Options really wanted the platform that Activ offers, why didn’t they go after Vela, a platform that they originally helped build? Or maybe they did, and Exegy was just more aggressive. Or—and here’s some wild speculation—was it a strategy to force Activ’s hand to sell? It’s worth noting that Exegy was involved in a lawsuit with Activ. Or maybe once that was resolved, Exegy needed an Activ killer if it couldn’t get its hands on Activ, itself.

These companies have the expertise to build these tools themselves, so I think it’s reasonable to deduce that they’re simply buying market share to pump up their value. Exegy-Vela, combined, is potentially more valuable to a bigger buyer down the road. Pico’s buying Redline potentially makes it a more substantial company in the eyes of investors as it goes through the process of going public via a $1.75 billion special-purpose acquisition company, aka SPAC. (I’d say Redline is more akin to Exegy and Fixnetix, which Options nabbed at the start of last year—it specializes in data technology and services like risk management, rather than functioning as a data vendor, per se.)

How about this for wild speculation: Who might buy Pico? Well, Ion isn’t public, right? And Broadway Technology (now free of Ion) hired former Pico chief operating officer Bruce Boytim as its COO. It could be that these small deals are preludes to much bigger deals—but, then again…

What am I missing?

With all that said, I feel there’s one piece of the puzzle that I’m missing. Buying vendors is an expensive way to build stuff that companies like Pico are probably already building in-house (and maybe even doing better). It’s also an expensive way to buy market share. So what am I missing? What do they each have that’s worth more than their traditional business lines?

I wonder if it’s more so about new additions. For example, maybe Exegy wants to combine its Signum analytics (as well as its “traditional” appliance business) with Vela’s data sources. Maybe Options wants to use Activ’s platform partly to exploit alt data sources (as well as “traditional” data, of which Activ is a vendor of record, and possibly combine the Fixnetix risk tools with alt data on Activ…maybe to do pre-trade risk on alt data?).

Let me just say this: I’ve been covering this space for about 15 years, and companies always say M&A is about combining capabilities…but how often does that actually work out in a seamless and integrated way? If you’re reading this column, you know this space, and probably are nodding your head right now.

So that brings me to, what Pico offerings can Redline enhance? Assuming they aren’t just settling for their second choice to increase scale, what do they see as its compelling proposition? Maybe it’s risk, execution, or something else. But sources have said that Pico was originally after Activ, and in this investor presentation from last year about their proposed SPAC merger, slide 20 outlines in some detail (but using no names) three types of companies it was proposing to acquire—one matched Activ.

Again, this is all conjecture…my thinking out loud, if you will. But as noted before, I guess the biggest question is whether these middling deals will lead much larger market data providers to swoop in to fight over these newly combined entities. Time will tell. Think I’m way off? Think I’m missing something? Let me know: anthony.malakian@infopro-digital.com.

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Waters Wrap: Inside the mind of the CTO

After having one-on-one conversations with eight different senior bank technologists, Anthony explains how these execs look at innovation strategy from a philosophical perspective.

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