A MEETING OF TECHNOLOGICAL MINDS.

Orc and Neonet, which joined forces earlier this year, are hoping to create global player in the in equities and derivatives technology trading space. CEO Thomas Bill highlights the challenges and opportunities.

Since the merger of Orc Software AB and Neonet AB was officially completed how has the integration process gone so far?

While it’s still early days since we started the merger integration after the deal formally completed this April, things have gone as well as we could have hoped and initial feedback is positive. Although still involved in some aspects to the merger, the new group should be fully operational in Q3 2010. Then it’s full speed ahead in defining new combined offerings.

Virtually from day one we managed to generate good results from cross-selling opportunities by promoting Neonet’s technology to Orc customers, as well as selling Orc technology – trading systems – to Neonet customers. Prior to the merger, Orc (as a pure technology company) did not really have a hosted connectivity offering, which Neonet brings.

We’ve identified significant demand within Orc’s customer base for the type of technology Neonet provides, using Orc’s sales force to sell their products to other brokers and trading houses that Orc has as customers.

Trading customers are asking us if they can execute [trades] through sponsored access via Neonet (Xchange Gateway), or to use Orc’s native connectivity, which is perhaps even more low latency for the high frequency trading (HFT) fraternity and for us to execute in Neonet’s name.

What are the challenges that lie ahead in aligning the respective platforms/IT systems, employees, sales & marketing?

As two Swedish fintech companies we share much commonality. Staff who have worked for both companies now work for the other company literally across the road in Stockholm. So, from a cultural perspective it bodes well for successful integration. There will be challenges, but already from day one we had a combined offering, which I think is quite unique.

Technology-wise we speedily integrated systems at a high level. Customers are already using Orc and trading through the Neonet gateways. Some IT aspects were completed before the merger announcement by virtue of certain Orc customers wanting to trade through Neonet and have their market connectivity solutions. With Orc having a much larger sales force than Neonet ever had, it will be Orc’s sales team that sells the Neonet technology (via the Technology Services arm). Neonet Securities will be kept as a separate subsidiary with their own sales force for the Transaction Services side.

How are client relationships being maintained and strengthened?

Looking at Orc’s customer base, we are now able to provide a new, enhanced and wider offering to them. They are really asking us to host connectivity, which Orc had not been able to do before. And, this is something that comes from right across our client base. Increasingly clients want us to take care of much more of their trading infrastructure and have as little to do as possible with connectivity to the market. If you look at Neonet’s customers, they have an appetite for more advanced front-office systems than can be provided through Orc’s portfolio.

In terms of retaining talent, making new hires or cutting staff, how will management approach this?

Within the Engineering teams (product developers) and sales we are increasing our staff. Where overlaps do exist such as in administration and corporate functions (e.g. a single CFO instead of two) we are undertaking some reductions. In terms of stock incentive programs for employees, in future I would like to have more of staff participating in equity incentive programs.

Where is the focus likely to be for new product launches over the remainder of 2010 and into next year?

We are putting out new products to the market both for Orc and for Neonet. Recently we launched a new version of Orc Spreader, a server-based automated futures arbitrage engine, and one can expect further developments later this year. More services and managed services in particular will be very crucial.

But critically for Orc it is not to lose focus on the most sophisticated trading segments where we are a key player. As a third-party vendor we believe that we should have by far the strongest and most advanced high-frequency and derivatives trading system.

There is also a big focus within Orc on trade automisation and algorithmic trading. We see good prospects for selling Orc’s trading systems (e.g. Orc Liquidator, our algorithmic trading engine) to their clients. And, we see our clients wanting to have a hosted and managed connectivity and expertise equities, for which Neonet has an infrastructure. We know there is high demand for that type of hosted solution in parts of North and South America.

What are the targets, in terms of clients and geography, for the new group going forward?

The targets do not necessarily have to be confined to exchange memberships, but could also be in terms of offering new markets through partners or other brokers. But what we are really looking at is how can we take Orc’s ultra-low latency software products and start to offer sponsored access, where our HFT customers can trade (e.g. trading in Neonet’s name using Orc’s native connectivity). We believe that is something – both in Europe and in the U.S. on the Chicago markets – that could be very interesting.

Cross-selling opportunities will initially be the “greatest” in Europe, but will this also mean most efforts on integration and expansion will centre on Europe first?

Yes, it will be very much be a staged approach whereby we will increase our activity. Neonet is still pretty much a European-focused company and this is where they have most of their staff. This is where one starts. Yet we also have many clients trading Europe from overseas. If there is a focus on European connectivity it still means we want to sell our trading systems to North American and Asian clients, but perhaps trading into Europe.

Prior to the merger Orc generated 50% of revenues from Europe, with the remainder split equally between APAC and North America. Neonet had far less on that score in those two regions, so we want start selling Neonet’s product portfolio through our Asian and North American sales offices.

While Orc already provides trading access to the Asia-Pacific (APAC) region through its Market and Broker Gateways, how will Neonet complement this?

First of all it centres on connectivity to Europe from the APAC region. That will be the initial focus. And, potentially it will involve selling the Neonet host connectivity to other brokers, banks and retail clients there. Orc Trader and Orc Liquidator in combination with Neonet’s front-end application Neonet Trader, gives Asian clients efficient access to both equity and derivatives trading on the US and European markets. Furthermore, thanks to Neonet’s technology offering, Orc will be able to provide its clients with hosted solutions and hosted access. With Orc’s 100-plus market connections, Neonet can provide its clients with even faster and easier access to global liquidity.

In the context of the term ‘Best execution’ does the merger and respective strengths of both parties play well to this?

Absolutely. We’re eyeing other markets where the liquidity is already fragmented or will become more fragmented like in Asia-Pacific. You will start to see MTFs or alternative execution venues also springing up in the APAC region, so that will be an opportunity for us. There are signs where you can see it in Latin America. One can also see it Canada where they have very strict best execution rules – more strict actually than in Europe. That presents a great opportunity to sell Neonet technology in terms of Neonet’s XG offering. Undoubtedly there are more markets to exploit.

What do Orc’s newer subsidiaries like CameronTec and the CameronFIX offer that is differentiated from the competition?

With most other independent FIX vendors disappearing from the market and/or being acquired by exchange groups, we wanted to increase focus on the standalone FIX business – but still under Orc’s umbrella. So, late last year we re-established Cameron as a separate and standalone company.

Both CameronTec and CameronFIX are entities that have a good opportunity to differentiate themselves, and indeed they are. CameronFIX is universally regarded as the reference standard for reliable/mature FIX engine applications. Cameron has by far the strongest brand and product in the FIX-engine market. Where others may have decreased investment levels in the FIX-engine area, we can make additional investment and put more emphasis on Cameron and their FIX technology.