Often, I receive feedback on my columns, under the banner of the “Waters Wrap.” I recently wrote about Pico’s acquisition of Redline Trading Solutions, some of the trends this deal points to, and what’s ahead for the mid-tier market data platform providers. Some of the feedback was good. And then there was this, from a former employee of Redline: “Hi Anthony, just read your article about consolidation in the market data space.  I came away thinking that you didn’t really know much about the industry.”

Now, to be fair, he’s kind of right. I mean, I’ve been covering this industry for 13 years (15 if you throw in my time at American Banker), but my coding skills are…ahem…minimal. I’ve never connected a server. Never built a machine-learning model. The idea of sitting in a scrum meeting (not as a reporter, but as someone who would have to participate and provide insight) makes me want to cut my tongue out. I’m a journalist. It took me 7.5 years to graduate with a B.S. (no pun intended, as it was a bachelor’s of science degree…but yeah, total B.S.) in journalism from Plattsburgh State University in way upstate New York.

If ever I present myself as an expert on any subject that isn’t boxing or cue sports, slap me across the face. BUT I do make a living by talking to smart, successful people in this industry, trying to connect dots, and presenting issues and views that may not have been discussed in such a way previously. That’s me at my best. At my worst…it’s all drivel.

Back to that column I wrote about market data platforms. One of the better retorts I received came from an employee of a major player involved this market’s consolidation—Exegy. David Taylor, co-president and CTO, wrote to tell me what he thought I had right and what was off the mark. That led to this post by Exegy CEO Jim O’Donnell, which I highly recommend you read, even if you don’t carry on with this column.

I appreciate this kind of feedback. It’s important you know that in this column, I just express the ideas, thoughts, concerns, and hopes of the people with whom I speak on a regular basis. So, along with our resident market data geek Max Bowie, I hopped on a Zoom call with O’Donnell and Taylor. Below are some of my thoughts following that conversation, where I look at Exegy as a case study in how the mid-tier market data platform space is changing. (But again, if you want it straight from the horse’s mouth, read that column by O’Donnell.)

Beyond fast applications

“It’s a relentless market in the sense that you have to keep pushing, and you have to keep innovating, not just to retain your existing business, but to grow,” Taylor said when Max and I asked about the market conditions that led to the Vela acquisition.

I will oversimplify this, but over the course of 15 years, Exegy has been a supplier of hardware-based feed handlers and ticker plants in the so-called “Race to Zero,” during which firms have spent a fortune on high-performance software and hardware components that can process market data faster than their rivals because speed means alpha. And when latency was measured in hundreds of milliseconds, a mere 50-millisecond time saving could translate to a big advantage. Thanks to a wide variety of advancements—not least of which include FPGAs, APIs, cloud, and machine learning—microsecond-level latency is today considered table stakes, which means if you can’t compete on speed, you need to pick a new game. It’s like entering into a game of no-limit Texas Hold’em with a hundred bucks when everyone else has a mil.

Conquering speed isn’t easy, but it’s become expected, even for the non-HFT crowd. And shaving a few microseconds off your latency is great, but that may be short-lived—the half-life on that advantage is ever decreasing. So, how can you win a race where everyone else is just as fast? You have to be fast, AND you now have to provide services on top of that speed to help institutions make more informed trading decisions that are ALSO done in the blink of an eye…if not quicker. Now, if you can shave off a few microseconds, the value is no longer in the time saving itself, but rather the value-add you can bring within those microseconds.

One only needs to look at the company’s patent filings to see that Exegy has invested a lot of R&D in the name of speed, but now it is looking to expand its presence beyond the application layer and into analytics.

With the acquisition of Vela, not only does it give them a broader distribution network, but Taylor says that Vela has made important investments in the execution side of the business, with a direct market access (DMA) platform for listed derivatives and its own options trading platform. Combined with Exegy’s tools, they can build out more options solutions, pre-trade risk components, and all-around analytics.

On top of that, Exegy uses AI to provide what it likes to call “predictive market data,” which provides a confidence score for the direction and duration of pricing, and detecting hidden orders synchronously with its market data feed. That AI component is represented in Exegy’s Signum application, which provides a suite of predictive signals. While Exegy was built on ultra-low latency appliances, Signum—it sounds to me, anyway—represents the future.

“We see that AI contribution—that prediction contribution—as applying not just in the market data piece, but around the entire trading cycle,” Taylor says. “So when we refer to Signum as a flagship product, I think it speaks to where we see our business going, as not just a provider of infrastructure, but a provider of unique content, and specifically predictive content or additional contextual content.”

It reminds me in some ways how HPR (formerly Hyannis Port Research) has slowly shifted into market data distribution after establishing itself as an ultra-low latency, pre-trade risk, and market-access gateway specialist. Again, speed is important, but it’s not enough. As noted before, what can you provide in between those precious microseconds? That’s the game-changer going forward.

More M&A?

Which brings us back to the main point of my original column that set this conversation in motion: What do these individual movements portend for future deals in the space?

I asked O’Donnell whether Exegy was simply bulking up its capabilities via acquisition to make its offering more robust, and thus make it a more viable target for one of the market data platform behemoths. Or, conversely, was Exegy on the acquisition hunt so that it could join that behemoth class itself? Hell, not so long ago, SS&C was a small Connecticut tech company, and look at it now.

Now, when reporters ask this question, we’re not expecting the answer to be, “Ya got me! We’re selling to FactSet in Q3. Please don’t tell anyone.” But it’s a question worth asking to get a better understanding of how the executive views the marketplace.

O’Donnell answered, “Yes to all of the above.” He noted that it’s a “rich acquisition space” with lots of startups and companies that have not achieved scale, who would benefit from combining forces with a company like Exegy. But at the end of the day, Exegy is now majority owned by a private equity firm, and “there will come a point where—if we’ve made ourselves appealing to larger companies in the industry—we would look to be rewarded for that.”

So truly he views both avenues as viable at some point in the future—be that one, two, three, or 10 years out is another question. So let’s think outside the box, shall we?

Crypto as an untapped resource?

While on the topic of M&A, I asked both O’Donnell and Taylor about their thoughts on getting into the world of crypto. As our Asia editor Wei-Shen Wong wrote recently, the wholesale capital markets are struggling with how best to broach this new asset class because there’s still a lack of institutional-quality tools in the world of crypto. Exegy has built out (or acquired) those types of tools for other asset classes, so maybe the company can position itself as early leader in the space with the help of a savvy acquisition or two, no?

“I think the answer to that is, ‘Yes,’ but it’s not a unanimous ‘Yes,’” O’Donnell said.

Taylor said that he thinks the answer is yes, but right now they have “a couple efforts underway to better understand how we can help in that area.”

And he noted that Exegy has “great relationships” with some of the largest institutional participants in the markets. So, this becomes a diversification play where, as those clients expand into these emerging crypto markets—and he specifically mentioned crypto derivatives, as the vendor is already onboarding crypto derivatives venues onto its existing options trading platform—Exegy is looking at how to provide the “same enterprise-class experience in these emerging markets.”

O’Donnell did have one caveat, though: “The prices for anything crypto-related in the M&A market are—from a buyer’s perspective—very high. So I’d say we have not identified something reasonably priced that had the right feel for Exegy.”

With that said, there’s still a lot of promise that Exegy doesn’t want to miss out on: “I think there are a lot of creative things being done in the industry,” O’Donnell continued, “and there’s clearly a need on the part of our clients to figure out how to deal with their clients who want to trade in crypto—and that’s the makings of a market. And barring government action, it’s a market that will continue to develop, and we don’t want to be left behind.”

I’ll leave it there. Since I don’t really know much about the industry, I’ll simply say that that when it comes to the market data platform space, there is very likely to be more consolidation, diverse acquisitions, and movement into new products and services.

And as always, I enjoy hearing about how wrong I am, just as much as I enjoy hearing that I’ve hit the nail on the head. But the only way I can learn is if you tell me: anthony.malakian@infopro-digital.com.

The image accompanying this column is “Road to Shu” by Yuan Yao, courtesy of the Cleveland Museum of Art’s open-access program.