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June 13 (Bloomberg) -- Wedbush Inc. agreed to buy Lime Brokerage LLC, which provides technology to high-frequency traders and securities firms, as new U.S. regulations force it to more closely inspect clients’ orders.
Wedbush, based in Los Angeles, will gain technology and automated risk filters that help the brokerage meet market- access rules that go into effect July 14. The rules, approved by the U.S. Securities and Exchange Commission in November, require brokers to ensure orders sent to exchanges and other venues comply with financial and trading risk checks and securities rules before they’re released into the market.
“Since the passage of the market-access rule, risk checks have become mandatory,” said Sang Lee, managing partner at Boston-based research firm Aite Group LLC. “Lime has helped active trading firms, proprietary shops, hedge funds and others gain access to markets with built-in pre-trade risk filters, so Lime’s technology is an easy fit for Wedbush in terms of them evolving their business.”
Wedbush is one of the biggest market-access providers to high-frequency trading firms in the U.S. It accounts for about 20 percent of U.S. average daily equities volume, Jeff Bell, head of Wedbush’s clearing and technology group, said in an interview today. Wedbush was the biggest provider of orders to Nasdaq Stock Market for stocks listed on Nasdaq and the New York Stock Exchange from July through April, according to data compiled by Nasdaq OMX Group Inc.
More Asset Classes
Wedbush will use Lime to expand its brokerage services across asset classes and regions for hedge funds, firms that trade their own money and professional investors, Bell said. He will serve as the chief executive officer of the Lime subsidiary. The company may expand the equities services in Canada, Europe, Brazil and Singapore and expects to move into U.S. futures and later foreign exchange, he said.
Lime offers an “execution capability we didn’t really have before,” Bell said. “There’s a good argument to be made that together we’ll be the best one-stop shop for high-frequency traders. We’ll have the right clearing and the right view of sponsored access and the ability to execute orders at ultra-low latency.”
Through sponsored access, securities firms such allow their customers to send orders to exchanges under their broker’s identification code. The new market access rules supersede current arrangements and apply to all the ways in which a broker’s customers trade on exchanges and other venues.
Founded in 1955
Wedbush, which was founded in 1955 and has about 1,000 employees, will retain Lime Brokerage’s staff of more than 50. Lime’s employees, more than half of whom are technologists and developers, will continue to work in their offices in Waltham, Massachusetts, New York and Jersey City, New Jersey, according to Alistair Brown, who co-founded Lime Brokerage in 2000. The firm began handling customer orders the next year.
Brown started Lime after running Tower Research Capital, a hedge fund he formed in 1998 with Mark Gorton, who settled a copyright lawsuit pursued by Warner Music Group Corp. and Sony Corp., along with other owners of music labels, for $105 million on May 12. The music-label owners claimed Lime Wire LLC and Gorton induced the infringement of copyrights on thousands of songs through peer-to-peer file-sharing software. Gorton founded Lime Wire in 2000.
Lime Brokerage currently accounts for up to 2 percent of U.S. equities volume, according to Brown. In 2008, it often handled about 5 percent.
Daily U.S. volume averaged 7.6 billion shares in the first five months of 2011, down 21 percent from the same period in 2010, according to Bloomberg data. The reduction has hurt Lime’s share of trading because its customers are mainly companies that buy and sell more when the market is volatile and volume is higher.
“It’s a very, very challenging environment,” Brown said. Being part of Wedbush allows the firm to expand beyond its role as an executing broker while giving its new parent company risk management, market access and market data technologies. “To continue to grow we needed to broaden our capabilities,” he said. “We were self-financed and private.”
He added that Lime’s technology will be useful as Wedbush expands into more asset classes and regions. High-frequency trading is gaining traction in Europe, parts of Latin America and Asia as exchanges and rival venues cater to the needs of those firms as they seek to increase volume.
“It requires a lot of technology when you have to connect to more than one exchange or place,” Brown said. “That’s in our wheelhouse.”
--With assistance from Don Jeffrey in New York. Editors: Joanna Ossinger, Nick Baker
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