The financial services industry can be ruthless with companies that don’t stay competitive. Failure to maximize efficiency or clinging to an outdated business model can earn a trouncing for a firm’s stock. Yet the industry is rarely as demanding of itself. Financial services firms often resist change, preferring to keep to traditional ways of doing things.

Nevertheless, Toronto-based Perimeter Financial Corp. is betting that the industry will not be able to ignore the lure of its superior technology for long.

The company’s roots go back to a trio of start-ups funded by Venturion VGI LP, a venture fund formed in 2002 to invest in “new-age financial intermediation infrastructure.” Venturion was created by the dynamic duo that headed E*Trade Group Inc. ’s Canadian operation: Doug Steiner, former chairman and CEO of E*Trade; and Joanna Liczyk, who was chief financial officer at that firm.

Although Steiner is the public face of the firm, Liczyk is equally critical to its success, he says: “My goal in this company is to make sure we steer ourselves into a great business.” Yet it can’t be a one-person show, he adds: “People like me need somebody to say, ‘Yes, that’s a good idea,’ or ‘No, you have to flesh this out a little more,’ or ‘No, go back and think about it some more’.”

The combination of vision and discipline led Venturion to invest in three technology-driven start-ups: CollectiveBid Systems Inc., Markets Inc. and IA Sciences Inc. Each aims to use cutting-edge technology to revolutionize parts of the financial industry.

CollectiveBid provides an alternative trading system for fixed-income securities and, more important, some genuine transparency in what has long been a very opaque market. Markets Inc. operates the BlockBook ATS, which offers institutional investors anonymous, automated equity trading. IA Sciences provides efficient middle- and back-office solutions to current and aspiring portfolio managers.

Each firm targets a different part of the financial services industry, but they share a conviction in technically superior infrastructure solutions that can add value for clients. The underlying logic is that a competitive advantage wins out in a relatively efficient market. Such thinking was popular in the Internet bubble days, when so-called “disruptive technologies” were expected to revolutionize a vast array of businesses.

The three units were founded separately, but have now been consolidated. Last February, the original venture fund was converted into a holding company, taking the name Perimeter Financial. At the start of this year, the holding company became an operating company. Previously, Perimeter took 100% ownership of the companies in its portfolio, buying out the minority investors in CollectiveBid and IA Sciences; it already owned all of Markets Inc.

The change came last July, after a $41-million second round of financing from Goldman Sachs Asset Management and Richardson Capital Ltd. , the merchant banking arm of the Winnipeg-based Richardson financial empire. With their buy-in, Goldman and Richardson joined some of venture fund’s original investors — the Ontario Teachers’ Pension Plan Board, CDP Capital, National Bank Financial Ltd., CI Financial Inc. and B.C. Investment Management Corp. , among others.

Steiner says the decision to bring the investments together into a single operating company is about taking advantage of scale and gaining efficiencies. The firm’s two dealer subsidiaries, CBID Markets Inc. and Markets Securities Inc., have been merged to form a single dealer known as Perimeter Markets Inc. There are also cost savings to be had in areas such as sales and marketing, allowing it to streamline its relationships with firms that are clients of multiple subsidiaries.

Expanding its scope

Uniting the three also means Perimeter is taking the next step in what Steiner sees as a journey toward creating one of the industry’s premier financial services firms. He intends to expand dramatically the firm’s scope in the coming year.

“We’ve laid a lot of pipe in Canada. We have about 90 clients, and there are really only a couple of hundred clients in the wholesale business in this country, so our goal is to expand services to all of them. But the range of services we can offer will increase dramatically.”

Perimeter is looking to expand the types of securities offerings it handles, distributing new issues and bringing in foreign participation. Most of this will be rolled out during 2006.

@page_break@The timing is right, Steiner says, because Perimeter has until now been focused on building critical mass in the ATSes. The fixed-income side has been around the longest. On the equity side, BlockBook is virtually a start-up, having been launched in mid-2005. It will be going into full release by mid-2006, he says, and not just in Canada but globally.

Steiner also promises more products and services for independent financial advisors and brokerage firms related to the processing side of the business, including “state of the art tools” to execute transactions, report them and report to clients.

Although the Perimeter companies promise a better way of doing business, that doesn’t necessarily make success a slam dunk. Various trading innovations have come and gone, largely undone by an inability to attract liquidity from the industry establishment. (Opacity in the fixed-income markets has served bond traders well.) And innovative portfolio solutions have floundered as well.

To overcome the natural, initial resistance, Perimeter has had to sell both prospective clients and regulators on its approach. Steiner says a new way of doing business is always viewed with skepticism initially. But, at the same time, he says, “Dealers are very fast to adapt to the ability to use new technology to process business more cheaply. And our business offering is: ‘You can do a lot more, a lot more cheaply, in our network than the way you are doing it now’.”

Services accepted

Perimeter’s services have been accepted by a large number of sell-side firms, he says, “Because they realize we’re not competing with them; we’re trying to expand the distribution of securities trading. We’ll be able to bring people into the Canadian market electronically that Canadian dealers can’t now access. So, we now have a large number of dealers using this technology, including most of the bank-owned firms.”

If the technology is superior and the industry establishment is open to using it, the challenge for Perimeter is delivering on its promise. That means continuing to attract the people who can make it happen. Steiner says the company has hired about 70 people in the past two years and it is still looking for “potential partners” for the firm, particularly in sales and technology. Much of the grunt work on the technology side is being done in Bangalore, India, but the firm is eager to bolster its ranks.

One of its selling points as a prospective employer is that there aren’t many fast-growing private companies in the financial services industry in Canada. There’s always the prospect of a lavish payoff for such a firm at some point down the road. Steiner built his previous firm, Versus Technologies Inc., from the ground up before ultimately going public (and being bought out by E*Trade), so he knows about the power of superior technology.

For now, he says, he’s focusing on building the business. He allows that a future public offering is “obviously an option. But we’re a private company right now.”

Yet, if his vision is successful, the financial services industry will be beating a path to Perimeter’s door. IE