Deriving force

THE FRIDAY INTERVIEW/BRIAN CONLON Chief executive First Derivatives:FIRST DERIVATIVES chief executive Brian Conlon is looking forward to Sunday. And he's not the only one. The streets around the company's headquarters on Canal Quay in Newry are pretty much festooned in Down's red and black colours.

The county’s clash with Cork will be the first senior All-Ireland football final that it has contested since its championship victory in 1994, so it’s no surprise that Conlon is planning to join many others on the road to Croker.

It’s likely to have a particular resonance for Conlon himself. He played for Down for a number of seasons in the mid-1980s before a knee injury put paid to his career. But as things turned out, that injury played a part in paving the way for his current career.

An accountant who learned his trade with KPMG, he went to work for Morgan Stanley in London, believing he’d get high-quality medical treatment in the British capital. What he got was pretty good – the same surgeon who treated Spurs and England player Paul Gascoigne – but he never returned to championship football.

He did return to Newry, though, in the mid-1990s, and as a result of his time in London, he had built up experience in investment banking, enough to start his own business.

So in 1996, he started First Derivatives as a consultancy and services business, aimed at the investment banking market. The company grew organically from there, with Conlon adding people as he needed them.

In 2002 it floated, taking a dual listing in Dublin and London. Just over two years ago, it reached another benchmark when it began developing and selling its own software.

The software is designed to operate in what Conlon calls a “low-latency, high-volume environment”. The number of individual trades that go through financial markets these days is huge. In New York, the number of transactions carried out every day has gone from five million a day 10 years ago to over a billion today.

The key is managing the information and making lightning-quick decisions. “If you think about highly liquid stock like IBM or Microsoft, the price is going to change maybe five, 10, 20 times a second,” he explains. “So if you’re going to make a decision like ‘I want to buy IBM when the price hits 100’, then you have to make that decision within microseconds or milliseconds.

“If you don’t get your order into the exchange then the price will have changed and the price will be invalid. Similarly, if you look at any trading screen, they are ticking many times a second. If you’re doing a programme trade you have to make that decision fast or else your price is out of date.”

The company’s software is programmed to make these decisions, ie buy IBM at 100 and sell it at 110. It happens without human intervention and literally at the speed of light. The phenomenon is known as algorithmic trading or “robo trading” and it is becoming increasing prevalent on financial markets.

“It’s becoming a self-fulfilling prophecy,” Conlon says. “The more trades that are going through, the more important algorithmic trading becomes and it contributes to the growth in volume.

“Obviously there are people still interested in trading from fundamentals, or directional trading, but it [algorithmic trading] is becoming more prevalent because of simple things like funds needing to rebalance or people trying to get in to beat the next guy to the finishing line.”

First Derivatives provides the plumbing for all this. Its customer list reads like a who’s who of investment banking: Barclays, Merrill Lynch, Fidelity, Goldman Sachs and so on. They also include the exchanges themselves. Its purchase of Hologram in Australia added the Singapore stock market to its list of clients.

It also has less well-known, but presumably no less influential, hedge funds on its books, most of whom Conlon says would prefer to remain below the radar.

Conlon has a map showing the company is doing business with a range of high-profile names in every major financial centre. Outside Ireland, where it has offices in Newry and Dublin, it has a presence in London, Australia and the US, where most of its 450 staff spend their time.

From a standing start two years ago, the products side of the business accounted for about 35 per cent of the £25.5 million (€30.5 million) revenues the company earned in its last financial year, which ended on February 28th, and of its £5 million (€6 million) or so profit.

First Derivatives has grown partly through acquisition, buying companies that filled gaps in its products and in its geographical markets. Over the last two years, it has done six deals worth a total of about $50 million (€38 million). The most recent was Lake Front Data in the US in August. Last year, it bought Irish company Congotec out of a particularly messy receivership. It remains on the lookout for further purchases. The company has a strong cash position, and also plenty of paper, and could spend up to £80 million (€96 million) if the opportunity were to arise. It did try unsuccessfully to bring off a deal worth £40 million (€48 million).

Some of its consultancy work revolves around programme trading, more involves risk management but it is not limited to that. The company is helping a large British bank dispose of its non-core assets, a project that Conlon says is long term.

First Derivatives typically hires graduates, mainly from Irish universities, who then go through a period of intensive training at the Newry offices, before joining one of its teams in centres such as New York or London, where they are likely to spend anything from six months to three years working on consultancy projects for a global bank, institution or hedge fund.

It sounds an attractive option. The company provides accommodation and looks after expenses, including the odd weekend flight home. Not surprisingly, there are plenty of takers.

But given that it’s classic “smart economy” work, and that there’s lots of hand wringing about the seeming inability of the education system to produce enough people with the right numerical and technical skills, is First Derivatives having difficulty finding the right people?

“I do think, perversely, we’re benefiting from the downturn at the moment, so we’re getting a very good calibre of people, but we’re still finding it tricky to find people with the A1 in maths, the real, top, top quality on the numerical side.

“We try to set the bar fairly high on that because a lot of the material we deal with is very complex. I guess, if we were to be truthful, we would prefer more people with those skills.”

Much of First Derivatives’ growth has come against the background of a Lehman Brothers collapse, a general crisis in the industry and, for now, a recovery that some would argue could turn out to be pretty frail if the world’s big economies go into the second leg of the dreaded “double dip”. Conlon is not unduly worried. Crises can produce as many opportunities for consultancy as booms.

The main thing, he says, is the sheer scale of the market. It’s conservatively worth tens of billions of euro and First Derivatives only has a small piece of it. “I’ve shown you a nice map showing some of our customers, I could show you an even more interesting map with people who aren’t our customers,” he says. So, has he made one? “I might try it,” he laughs, “just to give our sales guys a kick up the ass.”

Brian Conlon

Position:Chief executive, First Derivatives

Why is he in the news?The company's software arm, begun two years ago, recently bought Toronto-based Lakefront Data, its sixth acquisition in two years.

Background:From Newry, Co Down, after Queen's College Belfast he joined KPMG and worked in financial markets in London and New York. He returned to Newry and established First Derivatives in 1996.

Hobbies and interests:He's a former intercounty footballer and he cycles regularly.