July 25, 2012

Portware, the provider of multi-asset trading technology, acquired the technology assets of Aritas Group, formerly Pipeline Trading Systems, whose business was tarnished by a breach of investor trust and a regulatory violation this past October. Founded in 2000, Portware provides a leading execution management system (EMS) to enable institutions including long-only asset managers and hedge funds to electronically manage and route their orders and analyze their transaction costs. The company has beefed up its TCA tools, expanding into foreign exchange, and recently began offering a cloud-based EMS platform to hedge funds.

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"We think the [Pipeline] technology is excellent," Scott DePetris, Portware's chief operating officer, told Advanced Trading in an exclusive interview in mid-June, about three weeks before the acquisition was completed in July. Portware's COO said the acquisition "enhanced the company's quantitative analytics and added AI," referring to artificial intelligence. "It empowers the buy-side trader to have information at their fingertips and make more intelligent decisions," DePetris continued.

While the price of the deal was not disclosed, Portware purchased a portfolio of 17 patents covering the Aritas predictive analytics and algorithmic switching technology, which the company has rebranded as Portware Alpha Vision. In addition to the technology, 21 employees will join Portware from the development, research, service and sales side of Pipeline's former business. Aritas executive chairman Jay Biancamano, who joined the firm in November to oversee the company in the wake of its settlement with the SEC in October, has joined Portware, according to a Portware spokeswoman. Henry Waelbroek, director of research at Aritas, who developed the predictive analytics and switching engine technology as director of research at Pipeline, became the director of research at Portware in May.

Closing a Dark Chapter

The sale to Portware closes a painful chapter in the history of Pipeline, the dark pool operator that misled customers by matching their orders against the flow from an automated trading affiliate, Milstream Strategy Group, which then misused confidential information and traded ahead of clients, according to the SEC. Pipeline paid a $1 million fine to the SEC to settle the charges.

Biancamano changed the company's name to Aritas in November, severed its access to the block-trading venue and divested Milstream. But Sang Lee, managing partner at Aite Group, says changing the name of Pipeline to Aritas was doomed from the start, calling it "a sinking ship." According to Lee, there was no chance of revitalizing the old Pipeline Block Market, which was "extremely tainted" by the dark pool's mishandling of customer information.

While calling Portware's new capabilities "a value-added customer service," Lee says the sale of Aritas's technology assets to Portware "has many different plot lines." He notes that Alfred Eskandar, Portware's CEO since February, used to work at Liquidnet, whose block-trading venue was a competitor with Pipeline. "You have Alfred leaving Liquidnet and acquiring the assets of the old Pipeline that he used to compete against," says Lee, who adds that Jay Biancamano worked alongside Eskandar at Liquidnet, as the former global head of marketplace and corporate strategy.

The more interesting storyline, though, is Portware's acquisition of the Alpha Pro technology and algorithmic switching engine developed by Pipeline, according to Lee. "That could be interesting," he says, noting that the move underscores the emphasis on trade analytics by EMSs in a highly competitive market. "It seems that Alfred saw something interesting and felt he could integrate it," Lee relates. "We'll have to see how the customer base reacts to it."

He adds, "You definitely don't want alarm bells going off when you go into a sales meeting announcing that you own different parts of Pipeline. You want to avoid it." Some Portware clients, Lee suggests, may already have had exposure to the predictive analytics and algo switching engine, but have since become hestitant because of the Pipeline scandal. "Portware will have to spend time with these guys and explain how Portware is different," he says.

According to Portware, however, customers have reacted positively to the acquisition. "The response we've received since we announced this new model has been overwhelming. Four top-tier global investment banks and several regional brokers are participating, and multiple clients are already on the system, including pension funds, asset managers and hedge funds," Eskandar said in the July 11 release announcing Portware's completion of the acquisition.

Portware's DePetris told Advanced Trading, "The execution performance [of the Pipeline technology] was excellent, and clients would have been sad to see it go." He also noted that Portware and Pipeline shared some tier-one banks and buy-side firms as clients.

According to DePetris, in a major change, Portware will operate the predictive analytics offering as a service bureau, allowing buy- and sell-side firms to choose their own brokers. Under Pipeline's ownership, buy-side firms using the predictive analytics or algo switching engine had to execute through Pipeline's agency broker; Portware enables buy-side traders to execute through as many as 450 connections, including broker-dealers, exchanges and dark pools. "We are not an executing broker," DePetris said, emphasizing that the analytics will be broker-neutral.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...