ORC SOFTWARE
ANNUAL REPORT
2004
2 Orc Software in brief
3 History
4 A word from the CEO
6 Business concept,
objectives
and
strategy
8 Market
10 Competitors
12 Products
18 Alliances
19 Quality
19 Environment
20 Employees
22 Risks
24 Directors’ report
34 Income statement
35 Balance sheet
36 Shareholders’ equity
37 Cash fl ow statement
38 Notes
50 Audit report
51 Economic overview
57 Defi nitions
58 The Orc share
60 Corporate governance
63 Information for
shareholders
64 Glossary
65 Addresses
CONTENTS
12 Orc Software in brief
ORC
SOFTWARE
IN BRIEF
Orc Software provides technology for advanced market mak-ing, trading and brokerage. The technology is used for trading on exchanges and other financial markets throughout the world. Today, Orc Software’s clients are able to trade on more than 90 markets and the company continues to increase its offering of market connections at a fast pace. Clients include international investment banks, trading firms, brokerage houses, Internet bro-kers, institutional investors and hedge funds.
The software offered by Orc Software contains a wide range of functionality. Some of the most central functions include the sophisticated capabilities to analyze prices for derivatives instru-ments, automatic trading and risk management in real-time for hedging clients’ positions. The software makes it possible to trade a wide range of instruments including cash and derivatives on equities, fixed income, currencies and commodities.
Orc Software invests considerable resources in product develop-ment in order to ensure that its products are always leading edge and meeting the requirements of the most demanding users. In recent years the product portfolio has also been expanded with
new products for both the most advanced users and users with more basic requirements.
Orc Software is a global company with clients in 21 countries and local offices in Chicago, Frankfurt, Hong Kong, London, Milan, Moscow, New York, Stockholm, St Petersburg, Sydney, Tokyo, Toronto, Vienna and Zurich. Since 2002 Orc Software also has a distribution agreement with Reuters.
The company was founded in 1987 and has been listed on Stockholmsbörsen since 2000. In 2004 revenue equaled SEK 247 million and the operating income amounted to SEK 29 mil-lion. Orc Software is a financially very solid company, a key con-sideration for clients choosing a technology partner.
Orc Software licenses its software to clients. Quarterly license fees are related to the number of users and the number of market connections and include new versions and support. In the last few years Orc Software has complemented this license model with other revenue models.
3
ORC
SOFTWARE’S
HISTORY
1987 Company founded by Board member and previous Chief Executive Officer Nils Nilsson, who today works with business development within the company, and Board member Ulrika Hagdahl. The first version of the Orc System is developed. 1992 Orc Software’s proprietary market making activities on the Swedish derivatives exchange cease and focus shifts towards the development and sale of the Orc System. 1994 First version of Orc Trader launched.
1995 Orc Software begins its international expansion outside the Nordic countries and acquires its first clients in Switzerland and the UK.
1996 First clients in Germany, Hong Kong and Italy.
1997 Orc Software and OMX form a strategic alliance whereby OMX acquires 53 percent of Orc Software. First clients in Austra-lia and Japan.
1999 Offices opened in London, Milan and Sydney. First clients in the Netherlands and the US.
2000 Offices opened in Frankfurt, Moscow and New York. Orc Software is listed on Stockholmsbörsen.
2001 Offices opened in Hong Kong, St Petersburg and Zurich. The Orc ExNet service is launched. First clients in Canada, France and South Korea.
2002 Distribution agreement signed with Reuters. Offices opened in Tokyo, Toronto and Vienna. First clients in Austria. 2003 Orc Liquidator, Orc Broker, Orc Futures and Orc Online are launched. Office opened in Chicago. First clients in Belgium. 2004 Orc Software appoints a new Chief Executive Officer, Jonas Lindström. Promyzer, a mobile application is launched. First clients in Iceland and Singapore.
4
A WORD
FROM THE
CEO
A word from the CEO
DEAR SHAREHOLDERS,
It is a great pleasure for me to address the shareholders of Orc Software for the first time. On December 1, I took over the posi-tion of Chief Executive Officer when Nils Nilsson handed over the reins. It is with great enthusiasm that I look forward to taking Orc Software into the future – towards new challenges, but also towards new successes.
Orc Software is a unique company in many ways. The culture is characterized by continuous curiosity and creativity in combination with a strong desire to always be at the forefront and to develop the latest technology. Ambition is high and motivation is great. These conditions are necessary in a market that never sleeps. The company is built upon competent employees, who over the years have developed Orc Software into the company that it is today – a world-class leading edge company. Orc Software is leading the market in the development of the most advanced technology for securities trading. We also have a market leading position with respect to the number of market connections that we offer.
THE FINANCIAL MAP IS BEING REDRAWN
Electronic trading is taking over more and more at the expense of traditional floor trading. The development of electronic trad-ing is inescapable and favors Orc Software. Banks, brokerage firms, hedge funds as well as exchanges need to invest in new technology or upgrade older technology. Choosing a supplier has become more of a strategic decision, which has resulted in longer sales cycles, a trend that is expected to continue. Today, Orc Software offers access to more than 90 markets, and the effort to increase the number of market connections and link up even more participants continues at an undiminished rate. In 2004 Singapore and Iceland were added to our list of client countries. We are proud to announce that we now have opera-tions in 12 countries and clients in 21 countries.The map of the financial markets is being redrawn. The bounda-ries are becoming more flexible and markets are becoming more global. Structural transformations result in the arrival of new participants, while at the same time, others are exiting. We are also seeing new ownership structures for exchanges. In addition, we note that our technology is in demand by new participants, for example hedge funds. Given this new picture, Orc Software must continue focusing on adjusting the technology to meet the new demands and finding ways to broaden the use of our technology.
Tougher competition has also been seen on the product side with certain banks and brokerage firms developing their own systems, instead of purchasing complete solutions such as the Orc System. This is a development that we are fully aware of and we continue to customize our system based on clients’ needs. For many years Orc Software has worked to broaden its product range and the work that has been started to modularize the Orc System is an excellent example of how we are handling this com-petitive situation. Due to efficiency requirements many clients also aim to reduce the number of suppliers. By broadening its product portfolio in order to deliver more complete trading solu-tions Orc Software is successfully meeting this competition.
FOCUS ON PROFITABILITY
During the last two years Orc Software has made significant investments in developing the product offering as well as strengthening the support and sales functions. We have invested in building up our organization around the world in order to get closer to our customers. The cost basis for the company has therefore increased at the expense of margins. These invest-ments have resulted in new products reaching several markets. The more traditional products have also been upgraded and fur-ther developed.
Towards the year-end we were delighted to see that Orc Liq-uidator is now selling well. This product meets a demand for a specialized segment requiring very advanced technology. Two Nordic clients signed agreements for Orc Liquidator in the fourth quarter. An additional contract was signed on the European mar-ket at the end of December.
The investment strategy during the past few years has been suc-cessful and has resulted in increased interest in our solutions across all markets. A strengthened sales organization has also contributed to increased new sales, especially during the later part of 2004. We are now more efficient and are able to present our offering more clearly. Sales in Asia-Pacific represented the largest percentage increase, followed by Sweden. In addition, the number of clients increased in North America, especially in Chicago. But even though new sales were strong during the end of 2004, it is too early to draw any concrete conclusions for the future. Efforts to make the sales, support and product develop-ment units more efficient will therefore continue during 2005. The objective is to be even more effective at managing our client relationships and to increase sales with both current and new clients.
5
Going forward the focus is to increase profitability. The profit development for 2004 was not satisfactory. For the most part this was due to the expansion of the organization, the weakening of the US dollar, cancellations of client agreements and cutbacks by certain clients. Altogether this had a dampening effect on the increased new sales during the year. Our advantageous US dol-lar hedges matured successively during the year. At the begin-ning of the year we had a dollar rate equal to SEK 9.99 – at the end of the year the rate was SEK 6.77 – a drop of 32 percent.
ELECTRONIC TRADING IS THE FUTURE
I look upon the future with confidence. We see an increased activity on all our markets and derivatives trading volumes are increasing strongly. There is much activity, especially in the US, in conjunction with the expansion of electronic trading. The transition from floor trading to electronic trading entails, among other things, great changes in how securities are traded, which increases the need for advanced technology. In addition, the trend clearly indicates that participants want to be able to auto-matically trade several asset classes on several markets, which results in an increased demand for the products that Orc Soft-ware has extensive experience in developing.There are only a few companies in this dynamic industry that can display the collective experience and competence that we have at Orc Software. For many years we have been leading the way in a market that previously did not exist. Now we will continue our efforts to renew, refine and improve – and I look forward to being a part of and creating the Orc Software of the future.
Stockholm, February 18, 2005.
Jonas Lindström
Chief Executive Officer Orc Software
6
Orc Software’s business concept is to develop and distribute technology for real-time pricing, trading, risk management and market access in electronic financial and commodities markets.
OBJECTIVES
BUSINESS
CONCEPT
Orc Software’s overall objective is to be the leading global sup-plier of technology for electronic trading in the financial and commodities markets.
The Orc Technology shall constitute the core technology in the client’s business operations, as well as be the first choice for third party developers, consultants and business partners. Orc Software shall also provide service and support of the highest quality.
The market’s demands for compatibility between different sys-tems are steadily increasing. The Orc System is being developed with open interfaces, which facilitates integration and customi-zation according to the users’ specific needs. Furthermore, Orc Software is investing significant resources in modularizing the technology in order to give clients increased possibilities to choose different components in the Orc System.
INCREASED ADVANTAGES WITH THE
ORC TECHNOLOGY
Orc Software’s strategy is to broaden the applicability of the Orc Technology for newly emerging areas within electronic trading. By adapting the technology for new areas Orc Software is able to offer clients a more complete solution. Knowing that the Orc System is constantly being developed in order to meet clients’ new requirements also makes the system a more reliable choice. Orc Software is also working to stimulate and actively support clients’ internal IT departments, third-party developers and IT consulting companies to build solutions and products based on the Orc Technology. Thus, value increases for the clients while
CONTINUED FOCUS ON LEADING EDGE
TECHNOLOGY
Since the end of the 1980’s Orc Software has delivered leading edge technology for trading on electronic markets. The compa-ny’s strategy is to continue to invest a significant part of reve-nues into the development of the Orc Technology.
Product development takes place in close cooperation with Orc Software’s clients, which provides Orc Software with an exten-sive insight and in-depth understanding of the development of the market and the clients’ needs. Improved and expanded functionality is launched on a regular basis, which continuously increases the value of the clients’ investment in Orc Software’s technology.
Orc Software works on a continual basis to improve the perform-ance of applications and market connections so that clients are able to execute orders as fast as possible, even for extremely large order volumes. Orc Software’s calculation engine is one of the fastest on the market and can manage over 100 000 theo-retical calculations per second.
the Orc Technology, to a greater degree, becomes a central part of the clients’ total technical infrastructure.
FIRST-CLASS SERVICE
Orc Software is known for its first-class service and support. The company’s technology is a business critical part of the clients’ operations, which makes support on a local level an important component in Orc Software’s offering. Through the global sup-port organization, clients have access to supsup-port 24-hours a day as well as to specialist competence for more complex issues. Basic support is an integrated part of Orc Software’s offering and is included in the license fees.
Orc Software’s support and account management personnel has a close working relationship with the clients. An important task, in addition to managing everyday assignments, is to find solutions to clients’ requirements whilst providing Orc Software’s development department with information about the market’s demands.
GLOBAL SALES
Orc Software markets and sells the Orc System globally. Sales take place via the company’s global office network, whose local
competence is complemented by global specialists. A local pres-ence is important since an understanding of market-specific conditions is often a decisive part of the sales process. Orc Soft-ware also aims to establish distribution cooperation with strong partners in order to broaden and make the distribution of Orc Software’s products more efficient.
Orc Software constantly monitors the development on the world’s financial markets in order to be prepared to act quickly when new business opportunities arise. Geographical prioriti-zation is mostly determined by technology shifts, the market’s potential, character and maturity.
COMPETENCE DEVELOPMENT
The Orc System’s advanced functionality provides good opportu-nities for developing the competence of Orc Software’s employ-ees. The combination of highly educated and extensively experi-enced employees with individually adapted training opportunities, results in an internal exchange of knowledge and the development of a high level of specialist competence by the employees.
STRATEGY
8
Orc Software develops software for electronic trading on finan-cial markets. The software is used for order entry, pricing, analy-sis and risk management of various types of securities. Clients mainly consist of investment banks, brokerage firms, hedge funds and institutional investors. In the market, commercially offered systems compete with in-house developed, client spe-cific solutions. In addition, many exchanges offer simple exchange specific software for order entry.
TRENDS
The market demands fast and efficient order execution with direct access to many different market places. In addition, reli-ability and streli-ability are of major importance. Participants in the financial markets invest in comprehensive solutions of trading technology that provide the ability to use the same technical platform on a broader scale. As clients search for new revenue sources the desire to invest in even more sophisticated func-tionality increases. In 2004 interest increased in the ability to manage and trade several asset classes as well as to automate trading strategies, and this is expected to continue to increase. Below is a description of a number of basic trends which indicate that market growth will continue in the upcoming years.
Increased demand for market access
An increasing proportion of trading in financial instruments is taking place cross borders. One contributing factor is that par-ticipants, to an ever-increasing extent, tend to focus their analy-sis on cross border industries instead of national stock markets. Being able to trade on several markets and in various currencies increases the opportunities for so-called arbitrage trades. This development has led to increased demand for market access, which has also opened up the opportunity for new trading stra-tegies and the possibility of offering end-clients new types of products. It also increases the requirements for the ability to manage risk on a global basis.
Electronic trading
The market for trading with financial instruments is constantly developing and more and more market places around the world are switching exclusively to electronic trading. In the US, the trend is especially strong. At the beginning of 2004, 9 percent of the Eurodollar, one of the world’s most traded interest rate contracts, was traded electronically on the Chicago Mercantile Exchange. At the end of the year, 75 percent of the contracts were traded electronically. This creates an enormous pressure
ELECTRONIC
TRADING
INCREASES
Market9
for exchanges with traditional floor trading, such as the New York Stock Exchange, the Chicago Board of Trade and the Chi-cago Mercantile Exchange, to offer fully electronic exchanges. An increase in electronic trading also means an increased inter-est in more advanced functionality as well as the companies offering this functionality.
Increased automatization
Automatization of transaction management provides clients with the possibility of making business processes more efficient. Solutions with open interfaces that enable integration with other applications are especially in demand. For example, order entry by institutional clients may be integrated with the broker’s sys-tem and thereby take place automatically. For the institutional client this means availability of direct market access and applica-tions that support more advanced trading.
Systems that automatically monitor and execute orders are also in demand. These systems create the opportunity to devote more time to analysis and strategy planning while reducing the risk for mistakes. Automatic trading allows clients to manage signifi-cantly more orders in less time compared to floor trading. With
the assistance of these automated solutions, smaller participants are also able to compete by acting fast, globally and in a cost efficient manner. For example, with the help of advanced tech-nology, hedge funds are now able to challenge larger traditional participants.
New types of market places
The exchanges have been greatly affected by the globaliza-tion of the financial markets during the past few years. Today, exchanges are competing to an ever-increasing degree with alternative trading networks and trading forms. These trading forms allow for trading directly between different banks and brokerage houses without transactions taking place on a formal exchange. Furthermore, competition is also increasing between the traditional exchanges. This is, among other things, reflected in a number of exchanges offering similar contracts and prod-ucts, which in turn creates a demand for trading these products on several exchanges simultaneously.
OPPORTUNITIES AND THREATS
Orc Software works in a constantly evolving market, which brings both opportunities and threats.
Opportunities
• Globalization increases demand for market access and risk management.
• A greater portion of all trading takes place electronically. • More and more business processes are being automated. • Alternative market places demand new technical solutions.
Threats
• The competition in the market is increasing and there is a risk that Orc Software may not be able to hold its position.
• The technology is developing rapidly. There is a risk that Orc Software will not be able to adapt the Orc System at the required pace.
• An economic downturn and decreased client profitability result in a restraint on the clients’ IT investments, which affects Orc Software negatively.
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Orc Software’s competition can be described on the basis of three client segments: automated proprietary trading, proprietary trading and brokerage. Many of Orc Software’s competitors only offer products for certain client groups, which contribute to a fragmented competitor situation. When considering the instruments that are traded, and the geographical markets that competitors act in, the picture of the competition is split even further. For example, Orc Software offers trading in cash and derivatives on equities, fixed income, currencies and commodi-ties, while several of Orc Software’s competitors primarily focus on derivatives trading, such as the British companies Patsystems and EasyScreen, US Trading Technologies and Swiss Actant. Another important competitive advantage for Orc Software is the number of markets that clients are able to trade on. Only French GL TRADE can measure up to Orc Software’s offering of mar-ket connections. Furthermore, Orc Software has an exceptional position regarding financial stability that makes Orc Software a reliable and long-term partner.
AUTOMATED PROPRIETARY TRADING
The client segment for automated proprietary trading includes the most advanced users at investment banks and trading firms.BROKERAGE
Brokers manage large order flows from the firms’ clients and require fast execution for clients’ accounts as well as good con-trol over the status of each client’s portfolio. The largest com-petitors in this segment are French GL Trade, British Royalblue and Swedish Front Capital Systems.
DESCRIPTION OF COMPETITORS
Below is a brief description of Orc Software’s competitors. ACTANT develops software for market makers. The company was founded in 1998 and is privately owned. The head office is located in Zug (Switzerland) and the company has offices in Amsterdam, Chicago, Frankfurt, London and New York. APAMA supplies software that enables the formation and auto-matic execution of trading strategies. The company was founded in 1999 and is privately owned. The head office is in Cambridge and the company also has offices in London and New York. EASYSCREEN sells software for trading on derivatives exchang-es. The company was founded in 1998 and has offices in Lon-These users trade on their own account and need a fast and flexible software that is easily adaptable to their trading strate-gies. Orc Software believes that there are only a few companies that can offer a product with the same possibilities for client customization of trading strategies for automated trading as Orc Software. Furthermore, Orc Software can offer high per-formance direct market connections. One competitor is British Apama, which, however, lacks direct market connections. The greatest competition for Orc Software in this segment comes from in-house systems developed by the financial participants themselves.PROPRIETARY TRADING
This client segment includes users who, as in the segment described above, also trade for the firm’s own account. They have high demands for functionality, speed and reliability. This group is catered to by many of Orc Software’s competitors, such as British Ffastfill, Patsystems and EasyScreen, German RTS, US Trading Technologies and FlexTrade, French Murex and Swiss Actant. In-house developed systems also offer important competition in this segment.
DIFFERENT
COMPETITORS
IN DIFFERENT
SEGMENTS
11
don, Chicago, New York and Sydney. The company is listed on the London Stock Exchange. During the period April to Septem-ber 2004, the company had sales of GBP 1.2 million with a net income after tax of GBP -1.6 million.
FFASTFILL offers software for derivatives trading. The com-pany was founded in 1999 and is listed on the London Stock Exchange. The head office is in London and other offices are located in Chicago and Prague. During the year, Ffastfill acquired the US competitor Future Dynamics in order to broaden its offering for the middle and back office. Sales amounted to GBP 1.9 million during April-September 2004 with a loss after tax of GBP -1.6 million.
FLEXTRADE SYSTEMS offers a trading system with predefined trading strategies and risk management. FlexTrade was founded in 1996 and is privately owned. The head office is in New York and the company also has offices in London.
FRONT CAPITAL SYSTEMS sells systems for trading and risk management for several asset classes. The company was found-ed in 1987 and is a subsidiary of SunGard Data Systems which is
listed on the New York Stock Exchange. Front Capital Systems’ head office is in Stockholm and the company has representation in Chicago, Frankfurt, Hong Kong, Johannesburg, London, Los Angeles, New York, Singapore, Sydney, Tokyo and Zurich. GL TRADE sells trading systems and like Orc Software has one of the market’s broadest offerings of market connections. The company was formed in 1987 and has offices in Paris, Amsterdam, Brussels, Chicago, Frankfurt, Geneva, Hong Kong, Johannesburg, Lisbon, London, Madrid, Milan, New York, Seoul, Singapore, Stockholm, Sydney, Tokyo, Toronto and Zurich. GL Trade is listed on Euronext. During 2004 the company had sales of EUR 150 million.
MUREX sells software and services for equities, derivatives, currencies, fixed income and commodities, especially within valuation and risk management. The company, which is privately owned, has offices in Paris, Beirut, Dublin, New York, Singapore, Sydney and Tokyo.
PATSYSTEMS supplies software for derivatives trading. The company was founded in 1994 and has offices in London,
Chi-cago, New York, Singapore, Sydney and Tokyo. Patsystems is listed on the London Stock Exchange. During 2004, the com-pany had sales of GBP 11.8 million with a net income after tax of GBP -2.0 million.
ROYALBLUE sells software for global trading. The company was founded in 1997 and is listed on London Stock Exchange. Royal-blue has offices in Hong Kong, London, New York, Paris, Surrey (UK) and Tokyo. During 2004, the company had sales of GBP 60 million with a net income after tax of GBP 7.6 million. RTS REALTIME SYSTEMS GROUP develops software for exchange trading within several asset classes. The company was founded in 1992 and has offices in Frankfurt, Amsterdam, Chicago, London, New York, Paris, Stockholm and Sydney. The company is privately owned.
TRADING TECHNOLOGIES focuses on software for derivatives trading. The company was founded in 1994 and has offices in Chicago, Frankfurt, London, New York and Sydney. The company is privately owned.
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Automatic hedging functions ensure limited risk exposure for the market maker. This, combined with the automatic quoting func-tionality, enables trading and risk management of a large number of securities on several markets simultaneously. Having quoting obligations fulfilled automatically also frees time for analysis and other activities.
Deploying Orc Liquidator provides Orc Software’s customers with the foundation to build its own custom-designed market making system.
Risk management
The Orc System offers extensive support for risk management. The risk management and position keeping functionality enables Orc Software’s customers to constantly keep track of risk and profits/losses in real-time.
BROKERAGE
Within the brokerage segment Orc Software primarily offers Orc Broker, Orc Online and Orc ExNet.
designed specifically for futures trading, enabling execution of complex strategies with minimal input.
Automated execution of trading strategies
In order to accommodate Orc Software’s customers’ require-ments for the ability to program their own trading strategies in pace with changing market conditions, Orc Software has devel-oped Orc Liquidator – a product with extreme performance. With Orc Liquidator trading strategies can quickly be created as market conditions change and completely new strategies can be deployed as new opportunities appear. Using Orc Liquidator enables trading houses to define their own strategies as well as the parameters driving them, providing the maneuverability of a larger in-house development team, but without the associated cost and lead times.
Market making
For market making, Orc Trader offers volatility management and automatic quoting of most major instruments in the global finan-cial market place.
Orc Software’s customers can trade on these markets either through membership or through non-membership connections via Orc ExNet, which is a trading network service offering trading capabilities via brokerage partners. Customers can use the Orc ExNet service as a complement to their regular market connec-tions in order to take advantage of arbitrage and trading oppor-tunities on several markets without the need for membership on all the markets they access.
In addition, the Orc System can also be connected to leading market data vendors for receiving extensive price feeds and con-tributing data.
TRADING AND MARKET MAKING
Depending on the requirements and the products traded, the Orc System offers different alternatives for proprietary trading. Orc Trader has been Orc Software’s flagship trading product for over ten years and is used by professional traders, market makers and risk managers worldwide. For users looking for even more powerful performance and a way to fully control the program-ming and execution of their trading strategies, Orc Software offers Orc Liquidator. Additionally there is Orc Futures, which is The Orc System contains advanced functionality for trading and brokerage, allowing order execution, pricing, automatic trading and risk management on electronic markets covering cash and derivatives on equities, fixed income, currencies and commodities. The Orc System’s broad suite of products, easy integration with other systems and direct access to a vast number of markets around the world, present a base that is well suited for building and scaling the business for both buy and sell side participants on the financial markets.
EXTENSIVE MARKET ACCESS
Today the Orc System offers direct market access globally to more than 90 electronic markets, and Orc Software continues to expand this offering as new electronic markets emerge.
The extensive market coverage ensures that Orc Software’s customers have access to the markets that they want to trade on – both locally and globally. Regardless of where they are based in the world, it is very probable that the Orc System will offer con-nections to customers’ local markets as well as cover existing and future needs for market access in other countries.
THE ORC
SYSTEM
Products13
advanced electronic information and trading system which connects to the Orc System, via the Internet, for direct market access and position keeping.
Orc Online can also be white labeled, allowing brokerage firms to use their own branding and in-house or third party data such as news, analysis, quotes and web links.
Using Orc ExNet to expand brokerage business
Brokers can reach new customers and markets through Orc ExNet. This trading network service from Orc Software allows brokers to offer their clients direct access to exchanges all over the world without the need for exchange membership as well as additional services such as market data feeds and automatic downloading of data. It also enables order routing of any security supported by the Orc System.
Orc ExNet is an out-of-the-box solution with a very short time-to-market. Through standard functionality in the Orc System, a connection to Orc ExNet users can be quickly established. There are no cumbersome network connectivity or integration aspects
to consider - presenting brokers with a very cost efficient way of increasing the number of customers.
INTEGRATION
Orc Software’s open interfaces allow both customers and third-party developers to integrate their technology with the Orc Sys-tem. The open interfaces make it easy for users to connect their existing position keeping or back-office systems with the Orc System, enabling them to automate their business processes as well as manage orders originating from external applications. The Orc System can also serve as a technology platform around which a customer can build complementary systems.
TECHNICAL INFRASTRUCTURE
The Orc server system provides access to electronic markets and stores information about instruments, positions, orders and transactions.
The Orc server processes are designed to automatically identify and take advantage of available machine resources, in order to optimize scalability. They run on the most robust operating sys-tems available, Sun Solaris. Sun Microsyssys-tems’ range of servers The Orc Broker is primarily used by brokers to quickly and
efficiently execute their customers’ orders. This Orc front-end facilitates fast access to customer and market data. It includes support for a vast number of order types, including baskets, VWAP, volume orders and other types of care orders that provide effective tracking and management of orders.
Using Orc Broker provides brokers with an aggregated view of their customers’ transactions and orders, allowing them to quick-ly provide their customers with status reports.
For the broker’s institutional and retail clients
To meet the sophisticated trading needs of such versatile inves-tors as hedge funds and institutions, brokers are able to offer their clients the use of Orc front-ends which provide these clients with the advanced technology required for pricing and execution of complex products. Additionally, the global market access provided by the Orc System enables brokers to deliver best execution for their clients for cross border trades. Using the Orc System for brokerage also enables brokers to offer their clients the Orc Online application. Orc Online is an
Products
are used for first-class performance, scalability and availability for the critical central data used by the system.
The client applications are supported by Windows and Mac OS X operating systems. The Orc Online application is available for Windows.
Trading Proprietary traders trade on their own account. Market making Market makers have the obligation to quote buy and sell prices on an ongoing basis for the financial instruments that they are managing.
Brokerage Brokers trade on behalf of their clients: the insti-tutional and private investors.
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MARKET
CONNECTIONS
February 2005
No
North America
AMEX ArchipelagoBoston Options Exchangechange BOX Bourse de Montréal BdM BRUT
Chicago Board of Trade e-cbot Chicago Board Options
Exchange CBOE
Chicago Futures Exchange CFE Chicago Mercantile Exchange CME Eurex US
INET (Instinet) International Securities
Exchange ISE
Nasdaq
Nasdaq Liffe Markets NQLX New York Stock Exchange
OneChicago
Philadelphia Stock Exchange PHLX Toronto Stock Exchange TSX Toronto Stock Exchange
Venture TSX Vent
Europe
Amsterdam Switchch Switch Austria stria Stock andStoc
Optio
Options Exchange ÖTOB
CATS CATS-OS
Copopenhagen Stock Exchange CSE
EURREX EUREX
EurooMTS MTS
Euronext Euro
Euroneext.liffe LIFFE CONNECTLIFFE CONNECT
Euwax EuwEuwax
Iceland Stock Exchangechange ICEX Irish Stock Exchange ISE XEXETRA Italian Derivatives Market IDEM Italian Stock Exchange MTA Italian Stock Exchange SeDeX
London Stock Exchange SEAQ London Stock Exchange SETS London Stock Exchange SETS DTS London Stock Exchange RSP Madrid Stock Exchange
Mercado Español de
Futuros y Opciones MEFF Mercato Telematico
delle Obligazioni NCW Nordic Growth Market NGM
OMX SOM
OMX HEX
OMX (Stockholmsbörsen)
Oslo Stock Exchange OSE Quotrix
Riga Stock Exchange RSE
Swiss Exchange SWX
Tallinn Stock Exchange TSE
TLX TLX
virt-x
Warsaw Stock Exchange WSE
Xetra XETRA
15 Products
Asia-Pacific
Australian Stock Exchange ASX Hong Kong Exchanges SEHK, HKFE JASDAQKorea Stock Exchange KSE Korea Stock Exchange ITS KOSDAQ
Osaka
Osaka Securities Exchange OOSE Singapo
Singapore Exchange SGX Sydney Futures Exchange
Sydney Futures Exchan SFE res Exchange TAIFEX Taiwan Futures Exchange
T
Taiwan Stock Exchange TSEC Tokyo Intern
Tokyo International
ancial Futures Exchange
Financial Futures Exchang TIFFE change
Tokyo Stock Exchange TSE
Other
Nord PoolSEB TSI
Data
vendors
BridgeFeed Global
HyperFeed North America
Reuters Global
Key to connections
Orc Orc ExNet Orc & Orc ExNet
Equity Cash Equity Derivatives Fixed Income Power Foreign Exchange
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THE ORC
PRODUCT
RANGE
ProductsORC LIQUIDATOR
Orc Liquidator is developed for users who desire full control over the programming and execution of their trading strategies. The product has been developed to ensure extreme performance. Users of Orc Liquidator can define both the strategy as well as the parameters that drive it, providing the flexibility of an in-house development team, but without the associated costs and lead times. The trading edge comes from being able to quickly adapt trading strategies as market conditions change as well as quicky deploy completely new strategies as new opportunities appear in the market place.
ORC TRADER
The Orc Trader front-end is developed for professional traders and risk managers. The application meets the high requirements set by international traders to be able to handle extreme trading volumes, fast execution and comprehensive risk management. Orc Trader is highly flexible and can in many respects be cus-tomized and automated according to the requirements of the user.
ORC FUTURES
The Orc Futures application, specially designed for futures trad-ers, enables execution of complex strategies with minimal input. Using fast one-click order entry, a trader can quickly enter and exit a market. The automatic trading function in Orc Futures allows for single contracts as well as combinations to be auto-matically traded in one or multiple markets, which together with the bait order functionality offers a significant edge for traders active in arbitrage or inter-product spread strategies.
ORC BROKER
Orc Broker is specially designed for sales traders, sales and bro-kers. The application is an excellent tool for handling the brokers’ customer transactions, and provides, amongst other things, price information, order management, analysis of completed transac-tions and information on buyers and sellers. Orc Broker includes support for a number of order types such as VWAP, volume orders and has the capacity to handle large order volumes while trading on several markets simultaneously.
ORC EXNET
Orc ExNet – the trading network service provided by Orc Soft-ware – offers buy-side users such as advanced trading desks and hedge funds as well as sell-side brokers direct access to exchanges all over the world without the need for exchange membership. For brokers this service is a cost efficient way to attract new buy-side customers.
ORC ONLINE
Orc Online is designed for institutional and retail clients of banks and brokers. The application is an advanced electronic informa-tion and trading system, offering clients direct market access over the Internet. Orc Online offers real-time prices, news, chart-ing functionality and a portfolio module, as well as fully inte-grated order entry functionality based on the Orc Technology. Orc Online can easily be white labeled, allowing the bank and broker to offer their own application to their clients, including tailor made web links and logotypes.
Customers’ usage of the Orc front-ends
Orc Orc Orc Orc Orc
Customer group Liquidator Trader Futures Broker Online
Traders and market makers Risk managers Brokerage houses Institutional investors Private investors
17 Products
Proprietary trading
Orc Liquidator
Orc Trader
Brokerage
Orc Broker
Institutional investors
Private investors
Orc Trader
Orc Online
Orc Technology
Eurex Euronext.liffe Swiss Exchange London Stock Exchange Euronext virt-x Xetra Orc ExNetAn example of the Orc System set-up on a client site
The Orc System can support the trading needs for both brokerage and pro-prietary trading. As illustrated, some of the client’s propro-prietary traders use Orc Liquidator to defi ne their own strategies for trading futures and options on for example the indices Euro Stoxx and DAX, and on all components of the index. The client’s other proprietary traders use Orc Trader. With Orc Broker the sales broker can offer customers access to trading on the stock markets Euronext, London Stock Exchange, Swiss Exchange, virt-x and Xetra and the derivatives markets Euronext.liffe and Eurex. The broker’s institutional customers can for example use Orc Trader and the retail inves-tors Orc Online.
The customer site has membership connections to Eurex, Euronext.liffe, Swiss Exchange and Xetra. Alongside the membership connections, Orc ExNet is used to provide additional access to Euronext, London Stock Exchange and virt-x without the need for exchange membership.
18
ALLIANCES
Orc Software has formed several strategic alliances with the aim of both widening the distribution of the company’s products and providing end-clients with cost-effective trading solutions based on the Orc System’s order management and trading capabilities.
REUTERS
Through the alliance with Reuters, the global information com-pany, Orc Software has access to an additional global distribu-tion and marketing channel. For Reuters the alliance means that they can offer brokers and other sell-side firms the combined strength of their own core offering, which includes market data, news and risk management, together with the robust order man-agement and execution of the Orc System.
Reuters markets Orc Software’s products under the brand name Reuters Order Management for Exchange Execution (ROMEX). Their offering includes standardized components that facilitate integration with widely used middle-office and settlement sys-tems.
E2E INFOTECH
E2E infotech provides products and services to customers of Orc Software who want to integrate the Orc System with their existing business processes. E2E offers customized add-ons to the Orc System and has developed a portfolio of standardized components for integration with the Orc System. These are cost-efficient alternatives to many of the adaptations currently man-aged by the clients themselves.
Orc Software owns 34 percent in E2E infotech.
INFRONT
Orc Software has global distribution rights for Infront’s informa-tion and trading system, The Online Trader, and markets the product under the name Orc Online. Infront is a Norwegian soft-ware development company that provides streamed information and trading solutions over the Internet.
Orc Software owns 10 percent in Infront.
ATOMPRO
AtomPro creates powerful decision support tools for profes-sional traders by combining mathematical know-how, business knowledge and market experience. The company is a leading provider of advanced mathematical trading engines and software for the Dutch liquidity providers.
The cooperation with AtomPro strengthens Orc Software’s posi-tion within the Euronext region. With Orc Software’s multi-market connectivity, AtomPro clients can access global markets using the expertise of AtomPro. Orc Software and AtomPro together represent an exceptional knowledge base to further expand the know-how in advanced trading, and especially the mathematical skills needed to trade in electronic markets.
PROMYZER
Promyzer allows access to market data and financial news via a mobile phone. When the Promyzer application is linked to a broker or bank, it can also access the users’ own portfolio as well as trade in real-time on more than 90 exchanges worldwide via the Orc System. This is a white labeled product that can be inte-grated with the trading systems of brokers, professional traders, asset managers and banks.
Promyzer is a venture between Orc Software and Trustlink, where Orc Software owns 59 percent in Promyzer. Alliances
19
Clients place ever-higher requirements on the quality of a trading system. A shutdown in operations can imply lost revenue of sig-nificant amounts for clients. Orc Software invests considerable resources in quality assurance. By maintaining high quality, inter-nal resources can be focused on further development instead of correcting problems. Testing and quality assurance are becom-ing even more important as the technical complexity of the Orc System increases.
Orc Software has a specific department for quality assurance, which has overall responsibility for the quality of the delivered product. Before releasing a new version of the software, a series of internal tests are performed. These include automated regres-sion tests, manual regresregres-sion tests and verification as well as the testing of new functionality. Once these internal tests are passed, the software is released for external testing at a few pilot client sites. After final approval, the new version is released to other cli-ents.
During 2004 a number of quality improving measures were implemented. Among other things, a complete version of all soft-ware is now created each night and the scope and frequency of the automated tests have been increased. Previously the com-plete version was not created until the end of the development phase. By creating complete versions on a regular basis and increasing the scope of the automated tests potential problems are captured earlier in the release cycle.
Orc Software has a close working relationship with clients. It is often the client who is the initiator behind new functions and improvements to the system. The company uses a call handling system in order to provide good client service, and easily spread information within support and development. The system pro-vides information about problems that occur, gives support in priority situations, and functions as an information database.
THE
IMPOR-TANCE OF
QUALITY
SMALL
EFFECT ON
THE
ENVIRON-MENT
Orc Software develops and markets standardized software with digital production and distribution, which from an environmen-tal point of view implies no significant negative effects on the environment in terms of emissions from the company into the air, water or land. Orc Software’s impact on the environment is pri-marily related to energy consumption in the company’s offices and transportation of personnel, which mostly takes place by air due to Orc Software’s global coverage.
Orc Software’s business operations do not impose any particular environmental risks, apart from those mentioned above, and it is the company’s view that there does not subsequently exist any risk of significant future costs related to correcting environ-mental damage. The Group is not involved in any environenviron-mental litigation.
20
FREEDOM AND
RESPONSIBI-LITY CREATE
STIMULATING
ENVIRON-MENTS
EmployeesDaniele Moressa, Sales, Milan, 3 years with the company.
“I’m primarily involved in new sales on the Italian market. I also manage the Reuters relationship on the Italian level. I like the challenges in my job – to convince customers that we offer what they are really looking for. As an employee at Orc Software, you feel that you contribute to the growth of the company. Part of this, I think, is due to the management. They are very open-minded and you can share your ideas with everyone. For example, I was introduced to the CEO of the company and freely chatted with him on my first visit to the office in Stockholm, something that was not very usual in my previous working experiences!”
Molly McMahon, Trading Software Specialist, Chicago, 1 year with the company.
“As a Trading Software Specialist, my job is to handle the incom-ing support issues our customers have, whether they are func-tional, technical, or exchange-related. Because our software is specialized, it only follows that our support has to be specialized. We spend a lot of time with each customer, understanding the way they trade and how they can use our software in the most efficient manner. Our customers demand only the best, and they consistently raise the bar at which everyone performs.
The quality of individuals at Orc is truly unsurpassed. Everyone contributes to making great products and a great place to work. Each of my colleagues carries a tremendous amount of responsi-bility, and from such responsibility comes a passionate invest-ment in the success of the product.”
Oksana Cucha, Software Developer, Moscow, 4 years with the company.
“I develop and maintain the market connections to Euronext, Meff, Warsaw Stock Exchange and Budapest Stock Exchange. Since I also develop the software layer needed by the client to access the servers, I have a lot of contact with support staff and developers from the exchanges. I find it very stimulating to work as a programmer at Orc Software and I appreciate my colleagues. We have a lot of fun and spend time together also after working hours.”
Erik Heimdahl, Senior Software Developer, Stockholm, 12 years with the company.
“I work with the core system, which means that I am involved in the specification, design and implementation of central compo-nents in the Orc System. I have a lot of freedom in my work, but at the same time this is combined with a great responsibility; there are no free rides. I also appreciate the close contact with clients. Since the Orc System is a very business critical product you get quick feedback. If you were to do something that wasn’t quite right you will quickly know about it.”
Guido Eugen, Business Analyst, Orc ExNet, Hong Kong, 1 year with the company.
”I am responsible for selling the Orc ExNet offering in the Asia-Pacific region. In this job I speak on a daily basis to people in many different countries, organizations and cultures, which I find very stimulating. As a new employee at Orc Software, you have to take responsibility from day one. This is quite challenging but at the same time very rewarding. The segment of clients that we service includes some of the most demanding traders in the mar-ket. They know what they want and ask you very specific ques-tions. Hence the learning curve at Orc is extremely steep.
Number of employees per function Dec 31, 2004 42% Product development 27% Account management/support 17% Sales 14% Company-wide functions
Number of employees per region Dec 31, 2004
40% Sweden 23% Russia 20% Rest of Europe 9% North America 8% Asia-Pacifi c
40
23
20
9
8
Number of employees and total revenue per employee
1.5 2.0 2.5 2000 2001 2002 2003 2004 180 160 140 120 100 80 60 SEKm Number
Number of employees Total revenue per employee
21
NEW RECRUITMENT
During the year Orc Software continued to grow and recruited 31 new employees. The increase mostly took place within sales and account management/support. The number of employees increased in several of Orc Software’s offices; the largest increase was in the US, Hong Kong and Russia. In total, the number of employees amounted to 172 (141) persons at the end of 2004. Recruitment has primarily taken place through adver-tisement on the company’s website and via contacts. Turnover among key personnel remained low.
Employees in figures
2004 2003
Total number of employees at year-end 172 141 Average number of employees 157 137 Percentage of women employees 17 17 Percentage of male employees 83 83 Added value per employee, SEK million 0.9 1.2
Average age 32 31
Percentage of employees with a minimum of
3 years education at university level 85 86
MANAGEMENT CHANGES
During the year Orc Software made changes to the management group. Jonas Lindström took over as the new Chief Executive Officer for Orc Software on December 1, 2004. The resigning Chief Executive Officer, Nils Nilsson, will focus on business development in his new role within Orc Software. The new Exe-cutive Vice President and Chief Technology Officer, Joakim Johansson has taken over from Jonas Hansbo, who is now the Head of Algorithmic Trading.
INCENTIVE PROGRAMS
Orc Software’s employees have on several occasions been offered the opportunity to purchase call options in Orc Software in order to increase the employees’ participation in the company. The company currently has one active option program and one program that expired in March 2004. No new program has been offered to employees in 2004. More information about the option programs are available in the Directors’ report on page 32. Orc Software’s employees, including the Group management, have the possibility of receiving a bonus in accordance with the company’s bonus program. The bonus program for 2004 is based partly on a direct revenue-related bonus and partly on a bonus that is paid out if the Group’s revenue growth and operat-ing income exceed the targets set by the Board. The bonus for 2004 encompasses only sales related bonuses, including social security expenses, of SEK 1.0 (2.3) million. No commission or bonus was paid to the Chief Executive Officer or Executive Vice Presidents. In addition to bonuses the company’s employees may also receive sales commission. The Board of Directors’ remu-neration committee prepares the bonus programs.
22
EXTERNAL
AND INTERNAL
RISK FACTORS
Orc Software’s business is exposed to a number of risks, both external and internal. The risk factors that may have the great-est significance for Orc Software’s future development are set out below, in no particular order of importance.
TECHNOLOGICAL DEVELOPMENT
The market for pricing, trading and risk management software in different electronic market places is characterized by rapid tech-nological development. Should Orc Software be unable to adapt existing products or develop new products that reply to techno-logical development in time, or to meet clients’ needs in a com-petitive way, the company’s operations could be influenced nega-tively. In order to ensure that Orc Software maintains its frontline position concerning technological development, the company invests considerable resources in ongoing development of the Orc System. It is the company’s ambition to continue to invest considerable resources in product development in the future.
NEW PRODUCTS
Orc Software intends to continue updating the Orc System and to launch new products. It is not unusual for new, complex high-tech products to have certain initial faults, which are corrected
over time. There are no guarantees that such faults, which could have negative consequences for Orc Software’s clients and thus damage the company’s reputation as well as having a negative effect on the growth in revenue and income, will not occur. Orc Software’s standard license and support contracts contain a limi-tation of the Group’s liability for damages.
DEPENDENCE ON KEY EMPLOYEES
The future development of Orc Software depends to a certain degree on retaining key people with specific skills and long experience in the organization. The loss of key people could imply that Orc Software’s operations be affected negatively. Orc Soft-ware offers considerable responsibility and challenging tasks. There also exist incentive schemes that motivate personnel to become engaged in the long-term development of the company. Orc Software has so far had low staff turnover amongst its key employees.RECRUITMENT OF COMPETENT
PERSONNEL
There is a shortage of the cutting edge expertise that the com-pany is looking for in certain countries where Orc Software
operates, which in the longer run could affect the company’s operations. But due to Orc Software’s presence in a number of countries, the company also has the possibility, to a certain extent, of steering development work towards those countries where the availability of labor is currently good. In order to facili-tate the recruitment of developers, Orc Software has for several years had development offices in Moscow and St Petersburg since the availability of the type of development skills that Orc Software demands is good in Russia.
POLITICAL RISK
The absolute majority of the countries in which Orc Software conducts business are considered very politically secure. In some markets, for example Russia, the political risk is higher. Currently however, Orc Software does not see any threat towards the com-pany’s continued business in these markets. However, this does not indicate that such a situation will not arise in the future.
COMPETITION
The market for software for trading on electronic exchanges is fragmented and exposed to competition. It is possible that competition will increase in the future. Orc Software currently Risks
intellectual property. It is not certain whether the Group’s insur-ance would cover costs associated with attempts to intervene against such infringements.
LIABILITY
Orc Software’s products deal with extensive and complex trans-actions that often involve significant amounts. Clients are located in many different parts of the world, including the US. Although Orc Software attempts to limit the Group’s liability for damages in its license and support agreements in various ways, it cannot be ruled out that clients or others may bring claims for compensation for losses or damage that are claimed to have arisen as a result of faults or shortcomings in Orc Software’s products or services. Any such claims could result in Orc Software having to utilize significant amounts of its resources for legal proceedings and/or potential damages. It is not certain whether the Group’s insur-ance would cover the costs specified above. Orc Software is not currently the subject of any litigation.
For Financial risk management, see page 31. believes that the company is ahead of many of its competitors,
particularly when it comes to experience, product range, number of market connections, as well as the very advanced technical level of the products. Further Orc Software’s financial stability also places the company in a special position in comparison with many of its competitors. An investment in a trading system is long-term, and the client is dependent upon the supplier continu-ously developing the system.
INTELLECTUAL PROPERTY
The products marketed by Orc Software consist mainly of soft-ware that has been developed within the company over a long period of time. Orc Software believes that the company’s propri-etary products do not infringe the rights of any third party and the company relies on the copyright protection afforded by Swedish and international legislation. However, it cannot be ruled out that a third party may claim that the company’s products or services infringe the intellectual property of others. Such claims could result in Orc Software having to invest significant resources in legal proceedings and/or possible damages. Furthermore, others may attempt to improperly exploit Orc Software’s technology or to develop products that wholly or in part infringe the Group’s
24
The Board of Directors and the Chief Executive Officer of Orc Software AB (publ), corporate identity number 556313-4583 and domicile Stockholm, hereby submit the accounts for the financial year 2004 for the Parent company and the Group.
ABOUT ORC SOFTWARE
Orc Software develops and distributes technology for advanced market making, trading and brokerage on electronic financial and commodities markets. The company’s overall objective is to be the market leading global supplier of the technology upon which electronic trading in financial markets as well as commodi-ties markets is based.
As of December 31, 2004, the Group consisted of the Parent company, Orc Software AB, and the subsidiaries:
• Orc Software Pty Ltd. (Sydney) • Orc Software s.r.l. (Milan) • Orc Software Ltd. (London) • Orc Software GmbH (Frankfurt) • Orc Software GmbH (Vienna) • Orc Software GmbH (Zurich) • Orc Software Inc. (New York) • Orc Software HK Ltd. (Hong Kong) • Orc Software KK. (Tokyo)
• Orc Software Inc. (Toronto) • Orc Software Iberia s.l. (Madrid)
• Orc Software East AB (Moscow and St Petersburg) • Orc ExNet Transaction Services AB (Stockholm) • Orc Education AB (Stockholm)
• Orc Tradelab Robotic Trading AB (Stockholm) • Dancharia Research & Trade East AB (Stockholm) • Promyzer AB (Stockholm)
In Orc Software s.r.l., the Parent company owns 95 percent and the chairman 5 percent of the shares. In Orc Software HK Ltd. and Orc Software GmbH (Zurich) the Parent company holds 99 percent and 95 percent respectively and two other companies in the Group the remaining parts. The ownership of Orc Software s.r.l., Orc Software HK Ltd. and Orc Software GmbH (Zurich) is governed by local regulations. As Orc Software controls the remaining shares in these companies, they are consolidated in full in the consolidated accounts. In Orc ExNet Transaction Ser-vices AB, the Parent company owns 72 percent and the three founders of Orc ExNet hold the remaining part. In Promyzer AB, the Parent company owns 59 percent and the remaining
41 percent is owned by Trustlink Holding AB. In Orc Education AB, the Parent company owns 51 percent. The remaining part of Orc Education is owned by Swedish Trading Institute AB. All the other subsidiaries are 100-percent owned by the Parent compa-ny. Orc Software also owns 34 percent of E2E infotech Limited. The remaining shares are owned by TradingLab who owns 34 percent and the founders of E2E infotech who own 32 percent. Orc Software owns 10 percent of Game Federation Svenska AB. Furthermore Orc Software owns 10 percent of Infront AS.
THE YEAR 2004
During the year Orc Software increased new sales, especially in the last quarter. Despite these sales, earnings development is not satisfactory. To a certain extent this is due to clients’ own cutbacks, cancellations of client agreements and the weakening US dollar. Furthermore, investments in development, sales and distribution have not contributed to earnings as quickly as the company had expected. As a result the company will be increasing its focus on profitability.
MARKETS
In the Nordic region investment interest increased in the fourth quarter and two Nordic clients signed agreements for Orc Liqui-dator. These two agreements had financial effects in the fourth quarter of 2004. Following a long period of cost cuts, Nordic participants have started hiring again, which from Orc Software’s perspective means possibilities for more sales. Additionally, inter-est in trading on the Baltic markets has increased.
The rest of Europe developed well and another Liquidator agree-ment was signed at the end of December 2004. The financial effect from this agreement will be accounted for in conjunction with delivery in the first quarter of 2005. For efficiency reasons many clients aim to reduce the number of suppliers. Since Orc Software has broadened its product portfolio in order to supply full-coverage trading solutions, the company is well positioned among its competitors.
There is still a lot of activity in the US due to the increasingly prevalent electronic trading. The transition from manual to elec-tronic trading has led to, among other things, extensive changes in the way securities trading is conducted, which has increased the need for new technology. The ability to trade several asset classes automatically has become more important, even for small participants. The volumes for derivatives trading have also increased significantly due to the widespread electronic
trad-DIRECTORS’
REPORT
25
SIGNIFICANT EVENTS DURING THE
PERIOD
Changes in management
Jonas Lindström was appointed the new Chief Executive Officer of Orc Software and started on December 1, 2004. Jonas Lind-ström was most recently Chief Executive Officer of Front Capital Systems. Nils Nilsson, Orc Software’s previous Chief Executive Officer, is now working with business development and is a member of the company’s Board of Directors.
Furthermore, Joakim Johansson, previously Head of Develop-ment, has been appointed as the new Executive Vice President and Chief Technology Officer.
Reuters alliance
Reuters markets Orc Software products under the trademark Reuters Order Management for Exchange Execution (ROMEX). During the fourth quarter several clients signed contracts for ROMEX. In November, Reuters launched the product in Spain and agreements were signed with local participants on the Spanish exchanges SIBE and MEFF. A number of clients have chosen to sign agreements for ROMEX in conjunction with the conversion to Euronext.liffe’s technology for the derivatives exchange in Amsterdam. In Germany and Switzerland a number of local brokerage houses and banks have signed contracts and plan to start using the application in the beginning of 2005. The timing of the launch of ROMEX in a managed solution will be reassessed pending completion of a new Reuters technical center. Therefore, resources for ROMEX in 2005 will focus on the marketing of REBS (Reuters Equity Brokerage Suite). REBS combines the price discovery, global news and analytics benefits of Reuters 3000 Xtra, the exchange connectivity and trading benefits of the deployed version of ROMEX and order routing capabilities of RORE (Reuters Order Routing for Equities). RORE will also shortly be connected to Orc ExNet.
Orc ExNet
In the fourth quarter Orc ExNet established collaboration with Interactive Brokers for market access to leading derivatives exchanges in the US. Additionally, collaboration was established with AOT Stockbroking for market access to the Australian Stock Exchange. Earlier in 2004 Orc ExNet signed an agree-ment with Crédit Agricole Cheuvreux and E*TRADE Securities. In total, Orc ExNet now works together with more than ten ing. These changes have contributed to Orc Software receiving
several new clients, mainly in Chicago, during the fourth quarter. Canadian participants’ trading has become increasingly global, which has resulted in a growing interest for market connections and automatic trading functionality.
In Asia, sales in Hong Kong in particular have continued to develop well. Interest in trading on the Japanese and Taiwan-ese markets continues to increase especially from participants outside of these countries. Several smaller participants have left the Australian market during the year due to low volatility and tough competition, which has, to a certain extent, affected Orc Software.
There is an increased focus on advanced automatic trading in several of Orc Software’s markets, which has been confirmed by a positive sales development for Orc Liquidator.
The competition from systems developed house has in-creased. Certain clients wish to keep the flexibility and control offered by an internally developed solution. In order to meet this demand Orc Software has both developed Orc Liquidator and begun to modularize the Orc System in order to provide clients with an increased choice regarding which components they wish to buy. Orc Software’s strong position in regard to the number of offered market connections provides a significant competi-tive advantage. Furthermore it has become more important to be able to meet the demand for technology that enables trading in different asset classes, an area in which Orc Software has extensive experience.
Another trend is an increase in demand from institutional and private investors for more advanced trading technology. In many cases, the requirements from these participants are similar to the demands from larger investment banks and brokerage firms.
FUTURE OUTLOOK
Orc Software’s investments in sales and distribution in previous quarters have now begun to show results in terms of increased new sales. In addition, the company is seeing a general increase in activity on most of the company’s markets. This means that the company sees a solid foundation for continued positive devel-opment of new sales. The effect on total revenue, however, is expected to be small due to received cancellations and cutbacks.
Total revenue, expenses and operating income
Total revenue Operating expenses Operating income
50 100 150 200 250 300 SEKm 2000 2001 2002 2003 2004 26
outstanding shares of 14 850 000. Excluding Orc Software’s holding, the number of shares equals 14 336 500. The par value of the repurchased shares amounted to SEK 51 350. The aim with the repurchase authorization is to provide the Board of Directors with the possibility to create further value for the company’s shareholders by being able to change the company’s capital structure.
Product development
During the year a number of changes took place within the research and development department. Joakim Johansson was appointed new Executive Vice President and Chief Technology Officer. Furthermore, the research and development department was divided into four areas; core technology, front-end product development, algorithmic trading and quality assurance. During the year Orc Software continued to focus significant development resources on Orc Liquidator. The next version of Orc Liquidator will be released in the first half of 2005. Orc Trader, Orc Futures and Orc Broker have also been further devel-oped during 2004, especially with regards to functionality for automatic trading and basket trading. Significant resources have Directors’ report
brokerage firms, which provide Orc Software’s clients with sev-eral alternatives for trading in Asia, Australia, Europe and North America without exchange membership.
Market connections
As of December 31, 2004, Orc Software had direct market con-nections to 83 exchanges. During 2004 concon-nections to the fol-lowing markets were established:
• Archipelago, US • CATS-OS, Germany
• Chicago Futures Exchange, US • Eurex US, US
• Euronext.liffe, Netherlands • KSE Cash, South Korea • KSE ITS, South Korea
• London Stock Exchange, SETS DTS, UK • London Stock Exchange, SEAQ, UK
• Mercado Telematico delle Obligazioni, MOT, Italy • Nord Pool, Nordic region
• Madrid Stock Exchange, Spain • Singapore Exchange, Singapore • Warsaw Stock Exchange, Poland
As of December 31, 2004, via its cooperation partners, Orc ExNet offers 49 non-membership market connections in Asia, Australia, Europe and North America.
Hun Research
In order to educate a new generation of traders in advanced automated technology and to ensure that Orc Software today and in the future is able to provide by far the best technology for automated trading, Orc Software has entered into a cooperation with Singapore-based Hun Research. Hun Research provides technology and administrative assistance
