Investment Technology Group Inc. bought Majestic Research Corp. for $56 million in a bid to attract trading from clients including mutual and hedge funds, Chief Executive Officer and President Robert Gasser said.
Majestic provides research on more than 200 companies and 17 industries. It will be renamed ITG Investment Research, with its roughly 80 employees joining the broker’s 1,140. This is the biggest takeover for New York-based Investment Technology Group since its $230 million purchase of MacGregor Group Inc. was announced in July 2005, according to data compiled by Bloomberg.
Brokerages such as ITG that serve institutions including mutual funds are facing less business. U.S. stock trading dropped to the lowest quarterly level since at least 2008 during the July-through-September period, Bloomberg data show.
“Clients pay for research, they pay for content and they pay for things that add to the portfolio construction part of the process,” Gasser said in an interview. Early last year ITG became concerned about its ability to attract business should trading volume dwindle, curbing the amount of money customers could spend on execution. “We spent the next 18 months surveying the independent research landscape and understanding that part of our client business more deeply,” Gasser said. “Majestic stood out.”
ITG is purchasing Majestic with $53 million in cash and the rest in stock, Gasser said. His company had $325.9 million in unrestricted cash as of June 30. Its stock-market value was $638.7 million as of Oct. 22. The shares fell 2.1 percent, the most since Oct. 4, to $14.64 at 4 p.m. in New York.
Shares of ITG have dropped 74 percent to $14.95 since they reached a record high of $58.01 in May 2006. They have slumped 24 percent in 2010.
ITG is a brokerage firm and technology company operating in the U.S., Canada, Europe and Asia. It provides customers with algorithms, or strategies that trade blocks gradually based on the user’s goals and market conditions, systems to track and process orders in equities and other products, cost analysis of completed executions, and dark pools, or private venues that allow firms to trade anonymously with one another without disclosing their intentions publicly. Its Posit venue became the first U.S. dark pool operating during the trading day in 1987.
Majestic, formed in 2002 by Seth Goldstein and Chief Executive Officer Tony Berkman, uses licenses to proprietary data owned by other companies to provide intelligence on sales trends in industries such as telecommunications, real estate airlines. The New York-based company, whose clients include hedge funds, doesn’t issue buy, hold and sell recommendations, a practice that will continue at ITG, Gasser said.
Annual U.S. equity trading commissions paid to brokers totaled $12.1 billion at the end of the first quarter, with 53 percent, or about $6.4 billion, used to pay for research and related services, according to a June report from Greenwich Associates. The average commission rate was 2.8 cents per share, down from 2.9 cents a year ago, while hedge funds paid 2.5 cents compared with 2.8 cents in 2009, the Stamford, Connecticut-based research firm said.
The scramble by brokers for commission dollars has been exacerbated by declining U.S. trading. ITG traded a daily average of 158 million shares in September, compared with 199 million shares a year earlier, according to reports published by the company.
“Agency brokers are likely to be squeezed in the near term as buy-side clients struggle to allocate their shrinking equity pool,” Michael Mayhew, chairman and global director of research at Integrity Research Associates LLC in New York, wrote in a company blog post on Sept. 20. “A number of institutional investors have started limiting the amount of ‘execution only’ business they do in order to pay their research providers.” Integrity offers data and advice on research providers.
“We’re going to invest in them and their platform,” Gasser said of Majestic. ITG wants the research unit to cover more industries, expand geographically and increase its customer base among the broker’s clients, he said. Majestic’s Berkman will join ITG’s executive committee. “We are very aggressively assimilating the two firms,” Gasser said.