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Nasdaq Deal Puts Surveillance in Spotlight

August 2010

With no end in sight to the acceleration of trading speeds and volumes, Nasdaq OMX Group has agreed to acquire Smarts Group, a long-established leader in the market surveillance technology that is becoming increasingly critical in rooting out illegal or improper exchange and brokerage transactions.

The July 27 agreement, for undisclosed terms, will add what Nasdaq describes as "the most proven and widely adopted surveillance solutions in the world" to the offerings of the Nasdaq market technology business, which has more than 70 exchange and other securities-infrastructure customers in more than 50 countries. Sydney, Australia-based Smarts says it has 30 exchange and regulatory customers and 50 brokerage clients in more than 30 countries. The company has more than 130 employees and has been in the surveillance technology business since 1994.

The announcement underscores the growing importance of and demand for surveillance tools at a time when exchange operators and participants alike are on high alert for non-complying activity, both intentional and inadvertent, that may affect the smooth functioning of markets. The risk of "fat finger" errors and the still mysterious May 6 "flash crash" are fresh in market players' minds.

Nasdaq chief information officer Anna Ewing said Smarts will be a "strategic fit" with her market technology business, which generated $145 million in revenue last year.

"Efficient surveillance operations are imperative to ensure integrity in today's financial markets, and Smarts allows us to capitalize on the growing demand for surveillance technology products in exchange, regulator and broker markets worldwide," Ewing said in a statement.

Andreas Furche, CEO of Smarts Group, which was advised in the transaction by New York-based Marlin & Associates, said the affiliation with Nasdaq OMX promises "enormous growth opportunities" and "the direct connection to the U.S. markets that we have been seeking." He added that Smarts customers will gain from "working with a world-leading company that has a similar customer base and therefore understands the business and requirements of Smarts' customers."

Nasdaq's strategic move reflects not only the heightened attention to surveillance, but also the importance of technologies that enable it to keep pace with market changes. Complex event processing (CEP), a high-performance computing and analytic technology that has helped to fuel the growth of algorithmic trading, is now also being applied to market surveillance and supervision. Progress Software Corp.'s Apama division has been in the forefront of this trend, having announced three years ago that its Event Processing Platform would be a key component of the U.K. Financial Services Authority's SABRE II real-time market surveillance system. A similar deal with Turquoise, an alternative trading platform now owned by the London Stock Exchange Group, followed soon after.

Bedford, Massachusetts-based Progress Apama released an "accelerator" for its Market Surveillance and Monitoring Solution this past April, and the Progress Apama Capital Markets Foundation, announced in June, included "highly flexible market surveillance and risk management applications" among its system-development capabilities. Apama co-founder and CEP pioneer John Bates, Progress Software's chief technology officer, said the company had signed ten trading venues on to its surveillance solution in the first half of this year.

Meanwhile, at the regulatory level, Bates was recently named a member of the Commodity Futures Trading Commission's Technology Advisory Committee, which also has representatives of Bloomberg, Chicago Mercantile Exchange parent CME Group, GFI Group, IntercontinentalExchange (ICE) and the National Futures Association, among others.

CEP competitor StreamBase Systems of Lexington, Massachusetts, is also pursuing surveillance business. In June, London-based Redkite said it had selected StreamBase as CEP provider of choice for its Redeye trading surveillance product. StreamBase aims to form such partnerships with "industry experts," CEO Mark Palmer noted, adding, "CEP has already been established as the de facto platform to build automated trading systems. Next, we believe it will become the de facto platform for surveillance applications."

More and Enhanced Relationships

Smarts, which officially launched its technology into the U.S. market last year, has been particularly active this year with new and expanded customer agreements. For example, when the U.S. BATS Exchange, a Smarts customer, entered the European market, it extended its Smarts relationship as well. Also figuring in recent announcements were Swedbank of Sweden, Credit Suisse Standard Securities, CME Group and ICE .

ICE, Smarts' biggest derivatives exchange customer, represents "a new generation of global customer for Smarts, with its venues across the world and 24-hour trading," CEO Furche said in June. The exchange installation is to be complemented in August by the Smarts.broker system, delivering "in-depth surveillance services across all futures and options instruments traded on ICE's global futures markets," the Australian company said.

At the time of the CME Smarts.broker announcement in May, Furche said, "With increased regulatory pressure on futures and derivatives markets in general, the Smarts offering provides futures commission merchants, introducing brokers and other market participants with an extremely cost-effective and valuable tool to monitor trading activity and comply with exchange rules and market regulations."

Last year, Smarts said, it launched the world's first cross-market monitoring platform for derivatives. Smarts.broker "monitors most of the world's major derivatives markets, which has provided us a deep understanding and expertise in the complexities of detecting prohibited trading behaviors on derivatives markets worldwide," said Furche.

Marlin & Associates acted as exclusive Strategic and Financial Advisor to SMARTS Group.

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