Description

Based in France, GL TRADE provides the financial community with trading and order management software; market data; middle and back office solutions, and a network connected to 500 financial institutions and over 80 cash & derivatives markets around the world. GL TRADE has 26 offices located on five continents and over 3,500 clients. The main component of its business is Front Office Solutions, comprising over 70% of 2005 sales. 

GLT is consolidated by Euronext into its accounts even though direct ownership is less than 50%. Founders own shares through Financiers Montmartre which owns 55% of GLT and is itself owned 55% by Euronext. Euronext also owns 10% directly. With the merger of NYX and NXT, it is very likely that the current shareholding structure will be unwound. Furthermore new regulations in European trading offer a further catalyst for a re-rating of this stock.

Competitors include a number of both public and private firms.  Public firms include Orc Software, Royal Blue – Fidessa.  Private firms include Patsystems and TT. 

GL Trade markets largely to the sell side, but is currently improving its EMS Buy side offering. 

• Over the past several years, the capital markets have undergone significant changes.  This is due to the demand for greater access to markets with faster and more efficient electronic trading.
• Trading rules may have helped to erode business by the Exchanges and there is consolidation among the Exchanges.   
• As the marketplace continues to evolve, traders and money managers will require more sophisticated tools and expertise to help find liquidity, execute more effectively, and reduce the overall costs of trading.
•  MIFID (Markets in Financial Instruments Directive).  MIFID is identified by GL Trade and many of its competitors as an important regulation that will change the marketplace significantly. It is scheduled to come into effect in November 2007.  Its purpose is 'maximum harmonization' in the EU Member States: It also abolishes a current rule called, the 'concentration rule' which permitted Member States to oblige investment firms to route all client orders through regulated exchanges.  The key element of MiFID is to enable trading to take place on any exchange or multilateral trading facility in Europe, which will require improved communications networks. It also demands improved real-time pricing to allow trades to be executed as efficiently as possible. Also, client lists will have to be reclassified, a massive exercise in data storage and retrieval.
• Key impacts of the regulation include:
• Best execution rules.  Rules require that firms take reasonable steps to obtain the best possible result in executing an order for a client, including obtaining the best price, cost, speed, likelihood of execution and likelihood of settlement.  Firms like GL Trade will benefit from this rule as firms demand the technology required to manage trades efficiently.  

Strengths

Number 1 in France in terms of 2005 sales

• Number 1 in World in terms of number of employees
• Has largest multi-asset offering with connectivity to the most number of exchanges
• Strong and competitive technology, well known among even the biggest financial institutions

 Weaknesses

• Does not yet offer straight through processing (STP) from order entry to trade confirmation, unlike Fidessa.  In this case, Fidessa poses a threat.
• Client contracts are for 3 to 5 years.  The required length of a contract may deter clients from signing on.

Royal Blue - Fidessa

Fidessa offers a suite of applications that manage and automate front and mid-office business flows for sell side and buy side firms trading equities in the US, European, Japanese, and Asian markets.  Its trading platform captures client orders, routes the orders, whether these are derived from the phone, third party applications, direct from institutional or private clients. 

Fidessa appears to be the strongest competitor of GL Trade.  It has a strong offering, from front to mid and back office solutions for trading and appears to have a very good reputation, at least in Europe and in the United States.  According to one user, “Fidessa is very user friendly and is very quick.  It is a very reliable system and you can basically trade anything you want, including bonds, derivatives, cash equities, forex.      

ITG – MacGregor and Plexus Group

ITG is a full-service agency brokerage and technology firm that provides a full service execution platform, from OMS to pre-trade estimates for the buy side.  The firm is headquartered in New York and has offices in North America, Europe, and Asia.

In 2005, ITG acquired Macgregor, an order management firm, and also Plexus Group, which specializes in transaction cost analysis to form ITG Solutions Network. It was the first attempt in the industry to combine pre and post-trade analytics and research and execution and order management.  As of late 2006, it is planning to roll out its offering to Europe.  It is also introducing options trading in the US.

The Macgregor XIP Order Management Network is a broker-neutral, multi-asset class solution that combines powerful portfolio management, compliance, trading, and post-trade applications with a fully integrated and supported financial services IP network. Macgregor XIP enables buy-side firms to execute their investment decisions with increased speed, control, and efficiency, which results in improved performance.

Orc Software

Software is largely for the sell side, but recently began providing the offer to the buy side.  The company develops and distributes an OMS software for trading, real-time pricing and risk management of securities.  It functions under a revenue model in which customers pay a license fee quarterly in advance per user and server software.  Its software provides access to more than 100 electronic markets.  Orc has an alliance with Reuters which allows Orc access to a global distribution and marketing channel for sales to brokerage firms.  In Orc Software’s 2005 Annual Report, they say, “Only French GL TRADE can measure up to Orc Software’s offering of market connections”. 2005:  207 employees.  Revenue growth of 15% estimated for 2006. EBIT of 15% for 2006E.  Cash balance is high:  19% of total 2005 assets while short term investments account for 50% of total 2005 assets.  In 2005, Orc Software had no debt. 

GLT trades for roughly 9x 2007 EBITA versus low double digit multiples for its competitors and mid-to-high teens multiples in the private markets. The stock also pays a 4% dividend yield. The have net cash. This is an obvious LBO candidate but for the ownership, which could change. Intrinsic value is likely in the mid 50s versus the high 30s stock price as of today.

Catalyst