Opening Cross: The Intellectual Challenges of TA, IP and M&A

Whether an asset class is commoditized or not, analytics are an important tool in determining an instrument’s true value beyond its price alone, as well as what direction the market expects it to move—as demonstrated by the swathe of stories in this week’s Scrolling News section. These can range from relatively basic tools to increasingly sophisticated technical analysis tools, or convoluted indicators with buy/sell signals and how long you should hold an instrument.

Using the term loosely, one might argue that indexes are the original analytic—something that creates a composite value for a basket of securities—and one that is evolving apace, creating ever-more sophisticated methodologies to account for specific needs. Whereas Tick Data Corp. is expanding its historical tick data in Latin America and Asia to support high-frequency traders looking to enter these regions, the traditional way to gain exposure to a region or asset class is through indexes designed to represent a country, or i aspects of a country combined with other specifics to create an investment vehicle tailored to particular niches.

For example, indexes can be used to reflect market stability, such as Moody’s Investor Services’ Asian Liquidity Stress Index, which represents speculative-grade liquidity. Or, they can be used to create low-volatility, risk-optimized portfolios, such as the Stoxx+ Minimum Variance Index family, which the index provider launched last week in partnership with Axioma, a provider of risk and portfolio analysis tools. Firms can then use these as indicators, create portfolios that track the components, or invest in tradable assets based on indexes, such as exchange-traded funds or futures.

As indexes and associated products become more sophisticated, their creators understandably place a high value on the methodologies behind their construction. Hence the Chicago Board Options Exchange—which last week lost an appeal brought by the International Securities Exchange in a patent infringement dispute over electronic derivatives trading—recently asked a Chicago court to enforce an injunction prohibiting ISE from listing and trading options on the ISE Max SPY index, which CBOE and index partner Standard & Poor’s Indexes allege are basically S&P 500 options.

In fact, patents aren’t just driving lawsuits, but are also driving merger and acquisition activity. At Bloomberg’s Enterprise Technology Summit in New York last week, David Berten, founder and partner of Global IP Law Group, said that as companies seek to exploit new business areas and diversify revenues, they find themselves entering markets already protected by a minefield of patents, and suggested that companies seeking to enter a market via acquisition should ensure any purchase has a diverse array of patents to protect its intellectual property. This becomes especially important when—as noted on the same panel by Elias Mendoza, partner at Union Square Advisors—M&A activity is expected to be driven by larger players seeking to fill gaps in their offerings via strategic acquisitions.

In one example of this, Nordic vendor Marketmind last week acquired neighbor Stock Point with the two-fold aim of increasing the operating systems it supports—including for mobile platforms—and to target larger banks and brokerages. The real challenge for companies seeking an acquisition fix will be to leverage their purchases without allowing the integration to distract from the continued evolution of their own products, and ultimately combining them into a common platform, just as Nasdaq OMX has migrated the former Philadelphia Board of Trade trading and data platforms to its central Carteret datacenter, or how Markit has leveraged last year’s acquisition of Quantitative Services Group to expand its credit derivatives analytics with predictive factors based on equity and options markets—an important evolution to provide added insight over and above commoditized forms of analytics.