D.E. Shaw & Co. LP wants to go where no other Wall Street "quant" has ventured: into on-line banking and brokerage.
The securities trading establishment built on the computer science visions of its founder, David E. Shaw, sees a logical thread connecting its high-powered analytical workstations with financial consumers' desktops.
After more than three years of trying to make that cross-over through a series of investments and other strategic moves, D.E. Shaw has its first big buyer. Bank of America is installing DESoft, the on-line banking and brokerage system being marketed by a subsidiary, D.E. Shaw Financial Technology LP.
"We're sort of an unusual company in many ways," said Louis K. Salkind, managing director of D.E. Shaw & Co. and responsible for DESoft. "We have our fingers in a lot of different areas. What ties them together is that they all involve finance and technology."
The privately held D.E. Shaw was formed 10 years ago in New York, describing itself as an investment bank "on the intersection between technology and finance." Its core business was applying sophisticated computer modeling to investment strategy.
Four years ago the company founded a broker-dealer, Farsight Financial Services in Cambridge, Mass. Two years ago it made headlines in the Internet community with Juno Online Services, which offers e-mail accounts free to people willing to view advertising.
It formed D.E. Shaw Financial Technology-known as DESoft, like the software it sells-last January.
"We're really looking for industries where computational technology will fundamentally transform them," Mr. Salkind said.
Mr. Salkind, 40, started on this mission in 1988 when he joined what was then a three-person company. Mr. Shaw, the chairman and chief executive officer and a former Columbia University computer science professor, sought a meeting with Mr. Salkind to discuss his thesis on a real-time operating system designed to control a robotic arm and hand.
A 1978 graduate in mathematics and physics from Princeton University, Mr. Salkind worked on the early development of the Unix operating system at Bell Laboratories. He received a doctorate in computer science from the Courant Institute of Mathematical Sciences at New York University.
"I had a reputation in the Unix world, and David was looking for someone to build the original trading system," Mr. Salkind said. "David had this vision of combining technology and finance. I was always very interested in technology applied to actually solve real-world problems. So I joined early on."
Mr. Salkind helped develop the quantitative trading and portfolio optimization methods that D.E. Shaw now employs-techniques that have helped boost the capital base from $28 million in 1988 to its current $1.7 billion. The 20% annual returns that the firm has averaged since its inception are poured into new businesses.
D.E. Shaw's current staff of 1,000 includes a disproportionate number of computer scientists, systems architects, and financial engineers, distributed among offices in New York, Cambridge, London, Tokyo, and Hyderabad, India.
"We extend probably one offer for every 150 resumes we look at," Mr. Salkind said. "We have some of the top computer scientists in the world working for us."
Some of them have devoted energies to DESoft, the software that gives customers access via the telephone or the World Wide Web to stock, mutual fund, and checking accounts and electronic bill paying. The system is in real time, updating account and portfolio data continuously.
With DESoft, D.E. Shaw intends to play a role similar to that of companies such as Edify Corp. or Integrion Financial Network in linking electronic financial services with back-office legacy systems.
"That is where DESoft enters," said John de Souza, D.E. Shaw's director of business development and marketing. It aims "to provide on-line brokerage and integrate it with on-line banking offerings as well as other financial content, such as news, research, and fundamental data."
Bank of America would become the first to use the DESoft system in- house. Two other organizations-Lindner Funds and Gay Financial Network-are service bureau customers of the Farsight brokerage system. The Lindner alliance, announced in February 1997, was one of the first to result in one-stop financial shopping on the World Wide Web.
Mr. Shaw said at the time that his systems' order flow "sometimes amounts to 5% of the daily volume of the New York Stock Exchange. Financial institutions allied with Farsight can now take advantage of much of the expertise derived from this research."
San Francisco-based Bank of America, soon to merge with NationsBank Corp., plans to use DESoft to support an on-line brokerage service it said it will launch at the end of September.
Mr. Salkind said, "For regulatory reasons, you have to keep certain money and certain accounts segregated, but the computer can see all those things in context and can do things like sweep money from a brokerage account into a money market account overnight."
The BankAmerica Corp. subsidiary's license appears to have grown out of a strategic alliance that began with D.E. Shaw in March 1997. It was designed to give corporate customers access to what a press release at the time called "the equity-linked product capabilities of what has been called the most technologically sophisticated firm on Wall Street."
The companies are not commenting on what they are doing together, but BankAmerica chairman David A. Coulter said last year that the "relationship positions us nicely to grow our equity-related product offerings as the traditional roles of commercial and investment banks continue to converge."
Ultimately, the DESoft system has the potential to go beyond banking and investment products to include insurance, among other things, in its one- stop aggregation.
"This is very important to where we believe banks are going to go in the future," Mr. Salkind said. "They are going to have to provide, in an integrated fashion, one-stop shopping for all these financial products. The technical challenges of deploying them are very high. Those are the problems we've solved."
One thorny issue confronted by any virtual financial marketer is synchronizing customer account data across different back-office systems. DESoft addresses that by storing copies of data on local servers as well as on host processors. This "shadowing" of data bases was "the only way to get the required real-time performance out of the system and keep the data synchronized in the legacy system," Mr. Salkind said.
He said DESoft's ability to "work with different legacy clearing systems is a feature that doesn't exist anywhere else." The system runs on Unix servers and eventually will run on Microsoft Windows NT.
The company believes its timing is right for capitalizing on banks' interest in on-line brokerage services. "The market was not ready a couple of years ago," Mr. Salkind said.
Forrester Research of Cambridge, Mass., sees the number of on-line investment accounts growing from 4.5 million this year to 14.4 million by 2002. That opens the way for "a company that can combine brokerage and banking on-line (to) offer consumers true shopping and true choice from multiple providers," Forrester senior analyst Michael Gazala said.
Based on its track record, D.E. Shaw has bright prospects. Its Juno subsidiary, with 5.3 million subscribers, is second among U.S. e-mail providers, behind America Online Inc.
D.E. Shaw is planning to take Juno public sometime next year.
The DESoft subsidiary employs 90 people in Cambridge and expects to have 120 by yearend. There are also more than 200 at the software development center in India, where portions of DESoft were created.
"Software is so key to what D.E. Shaw is doing going forward," Mr. Salkind said. "There is a worldwide scarcity of good IT (information technology) talent. We have to go to all different places to find it."
The need for talent is one reason the company sits hard by the Massachusetts Institute of Technology campus. "We really do try to search out those guys at the top end of the spectrum," Mr. Salkind said.
Emphasizing employee retention, executives manage to keep the annual turnover rate under 10% in an industry where 30% to 40% is common.
"We are well positioned," Mr. Salkind said, "and we would really like to become the de facto standard and high-end quality provider for on-line brokerage services."