Jefferies To Acquire Integrated Analytics Corp., Co-developer Of Quantex, In Cash Deal

Institutional broker Jefferies & Co. has agreed to buy Integrated Analytics Corp. in a cash deal that gives top Integrated Analytics executives a profit participation in Jefferies' Investment Technology Group (ITG). Jefferies previously held a 30 percent stake in Integrated Analytics.

While details of the deal were still being worked out at the end of last week, sources close to the agreement were confident that the buyout was about to be finalized. The deal, which involves several million dollars in cash, sources say, has been in the works for months (TST, April 22). Officials at Jefferies and Integrated Analytics decline to comment on the agreement.

The accord consolidates Jefferies' existing relationship with Integrated Analytics through which the two companies developed Jefferies' QUANTEX order-routing system. But sources say that some of Integrated's Wall Street clients of its MarketMind decision-support system might be uncomfortable with a system that is the property of a rival firm.

MarketMind is a workstation-based decision-support system that utilizes fuzzy logic techniques to generate buy and sell recommendations. The system is being used at several major Wall Street firms and high-power trading boutiques. But sources say that Integrated Analytics -- overextended and undercapitalized despite the relative success of MarketMind -- needed either a large cash infusion or a parent with deep pockets to continue selling MarketMind.

These sources add that the success of Jefferies' QUANTitative EXecution (QUANTEX) -- aimed at portfolio managers who wish to dispose of residual stocks they hold after placing orders on Jefferies' POSIT crossing network -- was a big consideration in doing the Integrated Analytics deal. Jefferies is about to make a major marketing push with QUANTEX, which uses MarketMind as its user interface.

Sources say 35 institutions are lined up to use QUANTEX, making it a likely source of revenue for Jefferies. Integrated Analytics relies on monthly leasing fees for its software; but QUANTEX allows Jefferies to charge broker fees for every trade delivered through the system. With only four buy-side clients until recently, the system has handled 50 million shares during the past four months, sources say. The system now has 12 clients signed up in addition to the 35 waiting in line, sources say.

Some industry executives say that there is a downside to the new alliance: Integrated Analytics has made significant penetration of the New York Stock Exchange by selling MarketMind to the specialists on the exchange floor (TST, Jan. 28). And sources say the Integrated could make more Big Board sales.

But the NYSE has never looked kindly on some of Jefferies' more creative efforts at disintermediation: the Portfolio System for Institutional Trading (POSIT) and the newer Global POSIT, for instance -- two crossing networks. On the other hand, QUANTEX routes trades to the Big Board via the NYSE's SuperDot order-routing system. Time will tell whether QUANTEX's volume will be large enough to overcome the Big Board's ire at Jefferies' other businesses.

Jefferies' rivals, too, may shun MarketMind if they have concerns about supporting a competitor's business. Both Jefferies and Integrated executives are betting that MarketMind's strengths will overcome competitive unease. "We think the product has proven itself by now," says one Jefferies executive involved in the deal. "The firms that have it won't want to give it up."

Talk of an impending purchase or merger involving Integrated Analytics and Jefferies had been doing the industry rounds for several months. The reports had become increasingly heated in the last few weeks. Integrated Analytics sources maintained at the time that some kind of merger was possible with Jefferies and that the vendor was in talks with various other prospective buyers or partners as well. But with the purchase agreement with Jefferies, it would seem that other negotiations would cease. Still in the works, however, say sources is a possible joint venture with systems integrator FD Consulting Inc. But such a venture would not involve any kind of joint corporate interest.

Under the Jefferies deal, Integrated Analytics' president, Dale Prouty, will become a co-senior vice president of Jefferies' ITG along with Jefferies' Mony Rueven. Prouty will concentrate on customizing various proprietary trading solutions for Jefferies customers who use QUANTEX or the stand-alone MarketMind product. Both Prouty and Rueven will report to Jefferies' ITG head Ray Killian, who was active in formulating the deal.

Killian declines to comment on the Integrated Analytics deal. But he says Jefferies continues to improve the "analytic and execution functionality of QUANTEX." Sources also say the system might at some point be extended to route orders to exchanges other than the NYSE and to other automated trading systems as well.

Also down the road, sources say, may be a fixed-income version of QUANTEX that would route orders to Jefferies for execution. Such a system likely wouldn't be available "for some time," according to these sources. MarketMind may be enhanced too, sources say, by linking it with some kind of position-keeping software.