Nationsbank To Buy Chicago Research And Trading; Cities Expertise In Derivatives And Technology

In an effort to take advantage of the burgeoning market for quantitatively-traded derivative securities, NationsBank Corp. has set plans to acquire Chicago Research & Trading Group Inc. (CRT). Once the deal is approved, NationsBank hopes to reap the benefits of CRT's superior trading technology.

NationsBank is most interested in CRT's quantitative methods of trading over-the-counter derivatives, options and commodities -- including energy issues. The bank was also drawn to the deal by the prospect of linking its vast U.S. Treasury distribution operation with CRT's New York-based primary dealership. The purchase will leave CRT an independent subsidiary, with its management intact.

Some sources speculate that as a result of the deal a merger of NationsBank's trading operations with those of CRT is inevitable. One source says that CRT has moved to increase the space it now leases at its 440 South LaSalle St. headquarters by several floors in order to accommodate expanded trading operations. This couldn't be confirmed at press time.

However, officials at the two companies say they have no plans to consolidate. They emphasize that there is little overlap between the kinds of business NationsBank's and CRT's traders conduct -- and thus little opportunity to directly combine trading operations.

Were a major consolidation to take place, it would most likely put at risk the systems that now support NationsBank's 200-plus traders -- including video switches from Micrognosis Inc. and Reuters, and back- and middle- office systems from BIS Banking Systems Ltd. and SunGard Financial Systems Inc. CRT's 500-strong trading operation is supported by proprietary data distribution and analytic systems, which currently run on Hewlett-Packard Co. UNIX workstations.

Short of the wholesale replacement of trading room platforms, NationsBank and CRT officials say that a number of other opportunities for technology sharing and system consolidation have been identified. A likely short-term goal, they say, would be the extension of CRT's trading network into NationsBank's trading rooms, where it would supplement the bank's existing systems.

The officials say that a holding-company-wide risk- management system could also likely be implemented at some point, and that such a system would likely reside with CRT.

The officials say that the manner in which the two firms will share technology, and who will take the lead, remains unclear. According to NationsBank principal funding officer William Maxwell, "CRT has proven over a long number of years that they manage their risk very well, that they can quantify. That is exactly the kind of technology capability that we're after. For us to come in and try to in any way dictate to them what they should be doing would be an error on our part."

Says CRT chief operations officer Philip Hubbard: "Whatever makes common sense to do that's what we're going to do." Hubbard says that if any consolidation of trading operations happens it will more likely take place "for the products we [CRT] deliver." That means that the derivatives traders NationsBank now maintains -- and there are very few -- could be rolled into CRT's trading rooms.

As to whether the two companies' respective technology staffs will sit down together and attempt to establish standards, Hubbard says: "I'm sure we'll do that in every area."

Maxwell puts a slightly more conservative spin on the question: "If you isolate the institutional business, yes, we will at some point sit down and we will be testing their technology and whether or not we can broaden that into a lot of the other technologies that we have."

Fit to be Tied The fit between NationsBank and CRT is a classic one. The bank gets to offer its clients an expanded range of de rigeur OTC securities and the ability to more effectively manage its risk. Meanwhile, the trading firm gets access to a top-notch credit rating to support its off-exchange activities, along with a ready-made distribution network for its financial products.

Both Maxwell and Hubbard say that the dissimilar nature of the two enterprises is what makes the deal sweet.

According to Maxwell, while CRT is now "very oriented toward exchanges," NationsBank deals mainly with customers. Also different, he says, are the kinds of customers that their respective trading operations service; CRT targets high-end institutional and corporate clients and NationsBank targets "the middle market and up."

At the same time, however, CRT's business has been changing. Says Hubbard: "We feel that more and more this market has gone from the exchange to the OTC and in order to be a major player in the OTC market, you of course are taking on counterparty risk."

As for the marriage of CRT's primary dealership with NationsBank's appetite for U.S. Treasuries, Maxwell says that that fit, too, is based on dissimilarity of clientele. He says that CRT is "very oriented toward zero-coupon trading, finding arbitrage opportunities; we are trading much more for our customer positions."

And will there be opportunities to share bond-trading technology? "To some extent we will have to coordinate some of our activities," says Maxwell, "but I don't see that being a big problem."

From a trading technology standpoint, NationsBank could learn a lot from CRT. NationsBank's trading rooms remain widely dispersed around the country -- even after some consolidations resulting from its merger with C&S/Sovran Bank last year. For data distribution, the bank's traders rely primarily upon video-switching technology -- especially from Micrognosis Inc. -- and standalone services.

NationsBank became the fourth-largest bank in the U.S. after the merger. It reportedly maintains the largest securities portfolio of any bank and has in the past year become one of the top dealers in U.S. Treasury securities.

The bank keeps its two largest trading facilities in Charlotte, N.C. and Atlanta. The Charlotte room supports 150 traders, while Atlanta houses 40. Both operations deal primarily in foreign exchange and fixed-income securities.

The bank installed new Micrognosis systems at both sites last year (TST, Oct. 5, 1992). At the time, NationsBank assistant vice president of funds management Art Cunningham said that a key goal of the technology upgrade was to reduce market data costs.

NationsBank maintains other trading facilities, as well. The largest of these is in Dallas and is supported by a Reuters/Rich Inc. video switch. Smaller trading rooms are maintained in Houston, Tampa, Richmond, Va., Columbia, S.C., and Norfolk, Va. Houston, Richmond and Norfolk also have Rich switches. The bank's back-office systems are in Richmond.

CRT's technology is considerably sexier. In Chicago, the firm maintains a 500-position trading room, with a systems development staff of about 100.

Since H-P announced it would not continue to upgrade the line, CRT has been looking to replace its H-P Apollo Domain workstations. And, until recently, the firm appeared to be on an inexorable track into the arms of NeXT Computer Inc. processors running NeXTstep (TST, Jan. 13, 1992). But then NeXT Computer Inc. became NeXT Inc., a seller of software, and CRT revealed that it was already planning to buy 486 Intel processor-based PCs (TST, Feb. 22).

CRT, whose bread-and-butter business requires fast development of custom securities, still plans to use the NeXTstep development environment, according to officials there.

CRT's quest for a wealthy parent or partner has been in high gear for the past several months. A near-done deal to form a joint-venture with Mitsubishi Bank fell through last year, after regulatory approval dragged on for too long (TST, Oct. 19, 1992). Sources say that the sticking point with Mitsubishi was the Federal Reserve Bank's concern over possible anti-trust violations.

More recently, sources say, Merrill Lynch & Co. took a close look at CRT. Officials at CRT and NationsBank decline to comment on any prospective buyers -- though Hubbard concedes the firm had entertained three or four suitors in the past several months.

CRT and NationsBank are not the first couple of their kind. CRT's closest Chicago rival, O'Connor & Associates has over the years virtually been acquired by Swiss Bank Corp. Heavy regulatory scrutiny was applied there, too.

And Chase Manhattan Bank formed a relationship with Philadelphia-based Susquehanna Investment Group (TST, March 23, 1992), under which Susquehanna would provide currency derivatives trading models, among other things, to Chase.

Maxwell says he's confident that the NationsBank/CRT deal will be approved. "We believe that all the current activities of CRT are activities that are already permissible for a bank holding company."

Regulatory approval is expected to come through within the next three months, at which time NationsBank will shell out $225 million for CRT.