Investment Technology Group expects non-U.S. markets to generate almost half its revenue in 3 to 5 years as off-exchange trading venues known as dark pools and transaction cost software gain global popularity.
Executives with the New York-based agency broker and trading technology provider, which earned 24 percent of revenues outside its home market in the first quarter, also think the slide in markets could raise the profile of its products.
"People are more aware of transaction costs in difficult times than they are in bullish times. The easy answer there is if you make 20 percent every year, do you really care about 40, 50, 60 basis points of transaction cost?," Alasdair Haynes, chief executive of ITG's international arm, told Reuters in an interview on Thursday.
"Asset managers in falling markets are very, very careful of costs. Now whenever I'm in Asia, there's no one that we can't go in and talk to about transaction costs," he added.
ITG offers products that allow clients to analyze costs of potential or completed trades, manage and execute orders and employ algorithmic trading tools that chop orders into smaller chunks to prevent share prices moves that would hurt returns.
It is also one of a growing number of providers of off- exchange trading venues known as dark pools that allow investors to trade large blocks of stock without disclosing their orders in the open market.
Dark Pools Deepening
ITGs competitors in this sector include closely held rival Liquidnet and Nomura's Instinet unit.
Investment banking giants like Credit Suisse, UBS and Goldman Sachs Group also operate dark pools.
After proliferating in the United States, dark pool operators are gaining ground in Europe and Asia, a trend ITG sees accelerating in coming years.
"It's been key to us all along to have global ... execution capability. Our targets, at the corporate level in the next three to five years, are to get to the point where close to half of our revenues are coming from outside the United States," chief financial officer Howard Naphtali told Reuters.
ITG already operates dark pool trading platforms for the Australian, Hong Kong and offshore Japanese markets.
While the firm had looked at rolling these crossing engines into other Asia markets this year, Haynes said he now expects this to happen in 2009.
The chief executive said ITG first wants to expand the use of its Triton platform in Asia, which offers users access to multiple trading venues, including direct access to exchanges.
He said this will give it a larger base of potential users for its POSIT dark pool.
"We're not going to put crossing in until we have the right ingredients, until we have the right markets and the structure is right," Haynes said.
"We can get out there and say we've got first mover advantage, we've done it, and then get no crossing and get no matching and it would just upset the clients," he added.
New York-based Naphtali repeated a forecast that 2008 pre-tax margins at its U.S. operations would be slightly above 30 percent, though he noted final numbers would depend on trading volumes.
First-quarter pre-tax margins were 35 percent.
"Analysts are looking to model the business under different scenarios, which is why we'll give that margin guidance, but we'll only give it on the U.S. business because there's a greater level of certainty given 20 years of history there," he said.
"We do reiterate the point that with positive market developments, there is significant earnings growth potential as evidenced by the 35 percent margin enjoyed by the U.S. business in the first quarter."