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Re: The Ted Spread Soap Opera

Your article “The Ted Spread Soap Opera” (Exchange Notes, August 1998) recklessly misstates that the MarketPower technology was developed by Cantor Fitzgerald for proprietary use. Simple due diligence, such as a phone call to MDC, would have revealed that this statement is false. MDC, an independent company founded in 1987, developed the MarketPower system, and is the exclusive owner of the registered copyrights associated with the MarketPower software. Although Cantor Fitzgerald has suggested in the Delaware litigation referred to in your article that the MarketPower system was developed from software that MDC created for Cantor Fitzgerald, this is not true and MDC has clearly and unequivocally denied those assertions in court papers filed in the Delaware case. In fact, MDC is the exclusive and registered copyright owner of all of the broker systems it has developed, including those used by Cantor Fitzgerald. Surprisingly, your article makes no reference to these facts and gives no indication that Derivatives Strategy took any steps to ascertain or understand the issues in the Delaware case. Significantly, neither the author nor anyone else at Derivatives Strategy took the basic step of contacting MDC in connection with this article or researching the copyright ownership issues.

Furthermore, your article falsely states that an “embittered” Iris Cantor sold MarketPower to the Chicago Board Brokerage...First, as stated above, the technology for MarketPower was developed by MDC, not Cantor Fitzgerald, and thus the article’s implication that the MarketPower system was somehow given by Cantor Fitzgerald to Mrs. Cantor is nonsense. Indeed, the MarketPower system was not developed until after the settlement between Cantor Fitzgerald and Mrs. Cantor. Second, the MarketPower technology is the exclusive property of MDC, not Mrs. Cantor, who is the majority owner of MDC. Finally, Mrs. Cantor did not participate in the negotiations with the Chicago Board Brokerage. The decision to enter into a license agreement with Chicago Board Brokerage was made by MDC in furtherance of its long-term business objectives, and had nothing to do with any legal battle with Cantor Fitzgerald...

Andrew Seidel
president, Market Data Corp.

Derivatives Strategy responds:

Our article asserts that MarketPower “had been developed by Cantor for proprietary use.” This is incorrect: both sides in the conflict agree that MDC developed the software for the MarketPower system for the Chicago Board Brokerage, and we stand corrected.

The two parties disagree, however, on whether MDC developed MarketPower by using confidential information from Cantor. In litigation in the Delaware courts, Cantor argues that the two companies struck a confidentiality agreement in 1993, that Cantor thus shared a great deal of nonpublic information with MDC, that Cantor had MDC write some electronic trading source code, and that absent MDC’s relationship with Cantor, MDC had no experience in the electronic trading of Treasuries. The complaint states: “In 1987, B.G. Cantor caused a part of Cantor Fitzgerald’s computer programming and data distribution department to be spun off as a new corporation, MDC...MDC and Cantor Fitzgerald were under the common control of B.G. Cantor from MDC’s inception until shortly before his death in 1996...On March 19, 1993, Cantor Fitzgerald Limited Partners and MDC entered into a mutual confidentiality agreement whereby MDC expressly acknowledged that in connection with various transactions between Cantor Fitzgerald and MDC, Cantor Fitzgerald ‘will be disclosing’ to MDC certain ‘confidential information,’ including its nonpublic business practices and operations…MDC agreed not to use any confidential information for a term of 15 years, ‘other than as specifically authorized’ by Cantor Fitzgerald...Because of the confidential relationship that existed between Cantor Fitzgerald and MDC...CFS has also had MDC write the computer program instructions, or ‘source code,’ to implement certain of its brokerage systems that involve interactive trading/brokerage of Treasuries. To enable MDC to do so, CFS frequently has provided specifications and instructions—as well as business plans, electronic transaction strategy, system end-user interface designs, in addition to substantial business knowledge—and, moreover, gave MDC complete access to Cantor Fitzgerald’s unique trading systems and plans and discussed certain CFS customer relationships. Except for the indirect experience and information derived by MDC from its relationships with Cantor Fitzgerald, MDC had (and still has) no experience or expertise as an actual broker or trader of Treasuries...At the time the Chicago Board Brokerage began negotiations with MDC in June 1997, MDC was primarily a data vendor. MDC had never been a major player in the field of electronic trading technology. At the time CBB negotiated with MDC to supply it with electronic trading technology, Cantor Fitzgerald Limited Partners was the only entity in the market which used an interactive matching trading system for Treasuries.”

In regard to Mrs. Cantor’s role, it’s important to note that Iris Cantor and Cantor Fitzgerald settled a protracted legal battle over ownership of Cantor Fitzgerald in 1996, in which Mrs. Cantor was awarded control of MDC. A year later, MDC sold strategic software to the CBB, a rival of Cantor Fitzgerald. Although Mrs. Cantor is the MDC’s majority owner, we have no reason to doubt the information given in Mr. Seidel’s letter—that is, that she had no personal role in the arrangements with CBB. Although it was reasonable to believe that protracted legal battles engender bitterness, we were wrong to assert that she was bitter.

MDC has stated that its MarketPower system was not developed until after the 1996 settlement between Cantor Fitzgerald and Mrs. Cantor. We have no reason to doubt the information given in Mr. Seidel’s letter.

Derivatives Strategy regrets the implications of the article.

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