Schonfeld, Lightspeed Agree to Merge Retail Operations

Schonfeld Group Holdings and Lightspeed Holdings, two New York companies active in professional-level trading services and technology, said they have agreed to merge their retail businesses. The combination of Schonfeld & Co. with Lightspeed Professional Trading will represent .one of the largest companies dedicated to the professional trader,. they said in announcing their letter of intent Thursday.

Financial terms were not disclosed. Schonfeld Group will become a significant minority shareholder in Lightspeed Holdings. They expect to close the transaction by year-end and, by the second quarter next year, move Schonfeld.s customers on to Lightspeed.s platform, said Lightspeed CEO Stephen Ehrlich.

The companies and their technologies have their roots in the day-trading boom. The Lightspeed system grew out of Tradescape, which E-Trade Financial Corp. acquired in 2003. Lightspeed Holdings bought the latter.s E-Trade Professional Trading and ETP Technologies affiliates in July. Ehrlich, who was CEO of E-Trade Professional Trading, will be head of the merged entity, which will use the Lightspeed brand name, and Schonfeld & Co. CEO Andrew Actman will join the Lightspeed management team. Ehrlich said that this .giant in the field of active trading. will hold $250 million in customer assets and execute 100,000 trades a day accounting for about 2 percent of Nasdaq share volume, serving 700 active traders.

The active trading segment has seen a number of mergers in recent years. Schonfeld, for one, had purchased day-trading shops Heartland Securities Corp. and Trinix Securities, and last fall it acquired Electronic Trading Group, a pioneer in the field. Even after the consolidations, the business remains highly competitive, populated by firms such as Genesis Securities and Generic Securities, and scale has become a key competitive factor.

"It's a volume game--if you.re not doing a lot of shares, you.re not going to make money." said Josh Galper, managing principal of Concord, Mass. research firm Vodia Group. Mergers enable firms to eliminate administrative redundancies and improve pricing from providers of outside services.

"The trading business rewards scale," Schonfeld Group president Andrew Fishman said in a prepared statement. "Our ability to send significantly more volume through a superior trading platform positions our retail customers and Lightspeed Professional Trading customers for great success."

Before Schonfeld.s retail customers move to Lightspeed.s front end, the firms anticipate upgrading the platform to retain Schonfeld trading-screen functionality that isn.t available from Lightspeed. "Schonfeld traders will get what they.re used to, plus what we have," Ehrlich said. He added that Schonfeld customers will gain the advantage of Internet access, which Lightspeed offers, as opposed to having to trade in a Schonfeld branch office.

Lightspeed currently uses a segregated portion of E-Trade.s data center, enabling it to keep track of trades and route them to market centers. In its newly independent status, it would eventually have had to build its own data center or find outsourcing support. Ehrlich said it now plans to rely on Schonfeld.s data center on Long Island, which has options capability that "we.re looking forward to [building] into our equity platform."

Adding options should bolster Lightspeed's fledgling "mini-prime" business, in which it allows hedge funds, typically with less than $100 million in assets, to execute trades through other broker-dealers while keeping the assets in custody at its clearing firm, Southwest Securities. Ehrlich said there are currently a dozen such customers and a few to be added shortly.

Schonfeld is self-clearing, and Ehrlich said there is no imminent need to consolidate clearing even after Schonfeld customers are on the Lightspeed trading platform