Why an algo-trading software firm caught BMO's eye

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Recently, BMO Financial Group agreed to buy Clearpool Group, a New York-based provider of trading software and an independent broker-dealer operating in the U.S. and Canada.

Founded in 2014, Clearpool has approximately 60 employees and over 100 clients, primarily U.S. broker-dealers. Its algorithmic management system provides trading tools designed to help institutional clients get the most advantageous terms for the customer.

In its announcement of the deal, which is subject to regulatory approval, the Toronto company said it demonstrates “BMO's commitment to delivering leading-edge trading technology to its global client base.”

Many banks have divested themselves of their trading technology over the decades, while more recently making investments in fintech startups almost as a way to outsource innovation, says David Weiss, principal analyst at Market Structure Metrics.

"However, over time consolidation in mature trading technology markets like cash equities is inevitable, and BMO's acquisition of Clearpool may be indicative of the pendulum finally swinging back," Weiss said.

"Clearpool is relatively new in the space so it has a more cutting-edge technology stack than many of its peers, most notably being based in Amazon Web Services," Weiss said. "So this may have been an opportunity for BMO to make a kind of leapfrog jump into the space while renovating their own stack they offer to their institutional client base."

It remains to be seen how much of Clearpool's client base stays with it under its new ownership, Weiss said.

In an interview, Joe Wald, Clearpool's CEO, explained what his company does and where its technology fits in the capital markets technology world.

What does Clearpool do?

JOE WALD: Clearpool has built an algorithmic management system. It gives clients and broker-dealers transparency and control in the form of visualization and collaboration tools to design execution strategies that get them the best execution that they're looking for.

Our clients are large institutional money managers who are looking to buy or sell large positions of securities in a highly fragmented market, and are looking to avoid high-frequency traders, avoid causing a undue market impact and execute those trades in the most efficient manner. Our software gives them full control over their routing protocols, lets them decide what venues get an order, what order types they're able to use, and it gives them the ability to harness the power of the microstructure and make it work for them rather than them being in a position where other market participants are taking advantage of the market microstructure against them.

Does it help them break up their positions into smaller pieces so that they're less likely to be spotted by high-frequency traders and such?

That is definitely part of it. Our clients have much larger orders that they're looking to work over the course of a day, a week, a quarter. What's very important for them is that they are able to blend into the natural liquidity in the marketplace and not create disruption where they don't want to, specifically by showing their hand by leveraging order types that potentially can cause information leakage or undue slippage. We give our clients a host of different strategies that pertain to specific benchmarks, and then go a step further and give them all the tools necessary to be able to specifically guide those orders through the microstructure in a way that helps the client achieve whatever their best execution objective is.

BMO has said this acquisition will enable it to use Clearpool’s technology. Why buy the company instead of licensing the software?

This was in line with their strategic priorities of being able to deliver exceptional client experiences and the innovation behind that as well as the teams. We had a strategic relationship with them for many years that continues to grow. I think what they saw and what the industry has been looking at is, this type of technology is built on a modern tech stack, leveraging the cloud, leveraging visualization tools. This is the next generation of trading technology, and they wanted to own that and have the team that developed it working for them.

BMO very astutely recognized that owning this technology catapults them ahead of their peers, who have invested a lot in this type of technology but haven't done so in a very long time. Much of those technologies are pretty antiquated, and they don't have the level of transparency, customization and visualization that our platform does.

They were also very clear that they wanted to service the broker-dealer client base that we have. And owning this type of financial technology is an advantage for large firms. Clients are demanding tools that allow them to work collaboratively with their brokers to really home in on what they deem as best execution.

What we get out of this is a tremendous strategic partner to be able to work with to give us the resources we need to continue to build out the platform on a global and multi-asset-class basis.

What kinds of visualization does your software provide?

With our visualization tools, clients are able to see in real time where their orders are being routed, where their orders are being executed, how the strategies are performing overall, how different order types are performing, where they're seeing any market impact or where they're seeing potential reversion. So they're able to see things and adjust to them in real time, versus looking at a report at the end of the day, the week or the month to see what they can tweak. The tool allows the broker and the client to be on the same page at the same time watching what's happening in the marketplace. The most important component of that is the full transparency that we give.

Is the name Clearpool a reaction to the concept of dark pools, where people can place orders without being seen?

Our name reflects our commitment to transparency and to being experts within the microstructure. Clients do leverage our platform to access dark pools. But they do so with a different level of transparency and control that they didn't have before with other platforms.

Is Clearpool going to stay independent to some extent or are you going to become a banker?

We will remain an independent offering. At the closing, we'll have a separate broker-dealer as well, and we'll be working to continue to build out our platforms with the resources and the commitment of our new partner.

How much of a change will this be for your existing clients?

For our existing clients, there will be no change at all. It's business as usual.

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