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Protection racket

Protection racket

Source: Finextra Research

When treasury trading network eSpeed is compelled to reschedule its results statement because senior executives are tied up in a patent trial in Delaware, the sense of company strategy being shaped by the law courts is hard to escape.

ESpeed is no stranger to litigation. The company extracted tens of millions of dollars from US futures and options exchanges in the earlier part of the decade through its rigorous enforcement of the so-called Wagner patent. The patent, acquired by eSpeed for $3 million in 2001, described a method of matching bids and offers in electronic futures trading.

Flushed with success, eSpeed’s parent company Cantor Fitzgerald has since moved to protect its core US treasury trading business by patenting a method of electronic bond dealing and filing suit against Garban and BrokerTec, subsidiaries of rival interdealer broker Icap.

Icap alleges that the original patent application filed by Cantor Fitzgerald - which in the words of chief executive Harold Lutnick covers "cool new rules" of treasury trading - was subsequently extended to embrace dealing methodologies deployed by its rivals. Lutnick denies the charges, saying that the earlier patent filing described a prototype treasury trading system that was amended to incorporate "corrections and clarifications".

BrokerTec has already sidestepped the suit, thanks to a lower court interpretation that may yet invalidate the entire patent. A Delaware jury is currently deliberating the case against Garban.

Cantor Fitzgerald’s motivation in filing the claim seems to have less to do with protecting its intellectual capital and more with stalling and blocking a potent competitor. The acquisition of BrokerTec by Icap has propelled it ahead of eSpeed in the treasury trading market as traders are increasingly drawn to the firm’s broader asset range and deeper liquidity pool.

ESpeed also has patent litigation worries of its own. A federal judge in Illinois recently backed claims by Chicago-based Trading Technologies that the eSpeed dealing system infringes on TT’s trade display patents.

Trading Technologies, which claims to process in excess of 50% futures market share through its X-Trader platform, has already settled suits with two brokerages and is pressing for a 2.5 cents per side fee on all trades conducted over the Big Four futures and options exchanges.

In an open letter to the future industry, TT made the following telling statement: "Some in the industry still connect TT's value to our $50 million revenue and $6 million profit, ignoring the fact that TT's business plan to this point has not included maximizing profit….It seems inevitable that, once thoroughly educated about TT's value, at least one well-capitalized entity in all of financial services, etc., will offer an acceptable price for TT."

Of course, eSpeed and Trading Technologies have every right to protect their intellectual property from copycat rivals, but when the patent system is used to neuter competition and/or inflate a company’s value, the definition of patent abuse begins to take on a whole new meaning.

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