State Street Corp. is making a bid for the foreign exchange volume of hedge funds and other active traders by striking a deal to buy the independent exchange Currenex Inc.
The Boston banking company announced an agreement Monday to buy Currenex for $564 million in cash.
Simon Wilson-Taylor, a senior managing director at State Street and the head of its Global Link online trading network, said he expects the deal to close during the first half once it gets regulatory approval. State Street said it expects the deal to be neutral to its 2007 results but to add slightly to earnings in 2008.
The deal would combine State Street's multiasset trading system, which is widely used by institutional money managers, with Currenex's online system, which is geared toward active currency traders.
"What has happened to hedge funds as they mature, they have acquired some of the process-oriented needs that fund managers have always had," Mr. Wilson-Taylor said. At the same time, money managers, despite their longer-term investment strategies, also are seeking more efficient trade execution, he said. "That overlap in requirements has not been satisfied by anyone."
Combining the two companies' offerings, he said, would create "the most complete product offering in the market."
Analysts said the deal strengthens State Street's position in a market that is moving rapidly to electronic execution, from telephone-based systems, but they asked whether Currenex's acquisition might alienate the very traders that State Street is pursuing.
"The nature of trading is changing rapidly," said Brad Bailey, a senior analyst at Aite Group LLC in Boston. "The phone business is disappearing quickly. It's rapidly becoming highly electronic."
Currenex has built its business by developing a highly responsive trading system that lets users execute sophisticated algorithmic strategies quickly, playing off tiny pricing differentials among various currency pairs or between spot and futures markets, the analysts agreed.
Mr. Bailey questioned what market players' reaction would be to exposing their trading activities to a large institutional player such as State Street. "When a bank buys a neutral platform, there are always issues about neutrality," he said.
The ability to trade anonymously has been an attraction of the Currenex system, he said. "They like the fact that they can buy and sell and not have their information given up to the banks."
Axel Pierron, a senior analyst at the research and consulting firm Celent LLC, which is headquartered in Boston, termed the deal "a risky but clever move" for State Street. "The customer base is very different," he said. Mr. Pierron works in Paris.
"If they keep Currenex quite independent, it provides what the customer base desires," he said. "If they decide to merge the platform, it could be an issue." He also wondered whether the rapidly growing popularity of online trading could prompt Currenex's customers to seek more fruitful markets. "How long will hedge funds remain in the FX market?" he asked.
With pricing squeezing the spreads that traders can earn in foreign exchange, Mr. Pierron argued, "they might look for another kind of security to get the kind of return they're seeking."
