TT shows its hand in patent fight

HEADNOTE

COMING OUT PARTY

Independent software vendor Trading Technologies (TT) in December sent an open letter to the futures industry and followed up with a full page advertisement in the Wall Street Journal in early January, asking market participants

to embrace its "2.5? solution." The solution involves the four largest futures exchanges - the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), Eurex and Euronext Liffe - paying TT 2.5? per side for every futures and option on futures contract executed through those exchanges. In return, TT would agree not to be the aggressor in any patent infringement lawsuit involving any entity doing business in exchange-traded futures.

The problem the solution is seeking to address was not defined, but the letter indicates that TT is not as profitable as would be appropriate for a company with its market share. TT, which claims to have captured 50% of the market share of electronic trades at the four largest exchanges, notes in the letter that it has a cumulative net loss of $32 million over the last six years despite being the only futures-focused ISV that currently is profitable. TT is on pace to earn $6 million in net profits in 2004 on revenues of $50 million.

The letter confirms the widely reported TT request and is part of an evolving controversy stemming from TT being awarded patents relating to its MD Trader software.

TT is seeking compensation from the four exchanges although the exchanges are not users of TT's software.

ONGOING ORDEAL

TT sued ISV eSpeed over patent infringement shortly after being awarded the patents in August, and quickly filed and settled patent infringement suits with Goldenberg Hehmeyer and Co. and Kingstree Trading LLC.

The settlements, in which GHCO and Kingstree admitted infringement and agreed to pay TT a licensing fee, appeared to add validity to TT's patents. The eSpeed suit is still active.

TT argues the 2 5? fee would be better for the industry as a whole - though, TT contends in the letter, less profitable for TT - than if the company continued to litigate against individual patent violators and pursued multiple licensing agreements. It argues the solution would provide a volume-catalyst effect and hold down overall costs to the industry.

Though TT does not appear to hold any leverage over the exchanges to comply with its request, TT does make several veiled threats, including the possibility of a joint venture involving TT becoming part of a super exchange. TT says that it has received several offers and that if the right offer came along it would sell without notice.

One suitor could be TT's initial target of litigation, eSpeed. After all, eSpeed acquired the also controversial Wagner patent after it was sued by Electronic Trading Systems Corp., the company that held it, and then bought that company.

TT also notes that in addition to current patents, it has 80 pending patents.

The CME in response to the manifesto acknowledged that innovations from ISVs, as well as other market participants, have played a role in the exchange's success but notes it does not infringe on TTs patents.

"CME itself does not use front-end software interfaces and does not infringe on any patents owned by Trading Technologies," the exchange noted in a statement. The other exchanges have not commented on the letter.

By Daniel P. Collins