State St. will buy currency trade firm

State Street Corp. said it will pay $564 million to buy a foreign exchange trading system, reflecting the fast growth in currency trading driven by globalization and the rush of hedge funds to invest directly in the area.

State Street, the big Boston financial services company, said it will combine the New York firm it is buying, Currenex, with its own foreign exchange trading platform known as FX Connect.

While FX Connect has a strong base of customers, State Street said Currenex will serve hedge funds and other specialized investors who want to make direct bets such as whether the dollar will rise or fall against other currencies like the euro or the Japanese yen.

"Foreign exchange is becoming an asset class on its own," said Joseph L. Hooley, State Street vice chairman. "This will take us to a broader customer segment, by picking up the active traders."

Currenex's largest owner is Boston investment shop TH Lee Putnam Ventures, a joint venture of Thomas H. Lee Partners, the Boston private equity firm and Putnam Investments, the Boston mutual fund company.

Brad Bailey, Aite Group technology analyst, said the deal shows Currenex's resilience after the company suffered through the downturn of securities markets earlier in this decade. Now, the merger will position State Street to compete more directly with other large foreign exchange trading systems such as FXall of New York, Hotspot FXi of New Jersey, and Lava Trading, now owned by Citigroup, he said.

All the companies are capitalizing on the surge of money into foreign currencies, which is likely to rise to $3 trillion in total trades per day by 2010, up from $2.3 trillion in mid-2006, according to London consulting company ClientKnowledge.

Bailey said the volumes have roughly tripled in recent years. One reason reflects the rise of globalizing forces, which mean more corporations are doing more business overseas. Perhaps more significantly, hedge fund managers are making many more direct bets on whether certain currencies will rise or fall, expanding the area far beyond its base of central bankers, commercial lenders, and corporate treasury departments.

Currenex's technology allows smaller traders "to do things that only banks could do in the past," Bailey said, such as taking positions in currencies from minor countries in near real time. As exchange rates become more transparent to more bidders, the biggest trading customers are expecting trades to be executed in milliseconds.

Currenex's 85 employees will be combined with a similar number of people who run FX Connect, State Street executives said, and no layoffs are likely as part of the deal. State Street said it will pay cash, which it said will "slightly" improve earnings in 2008. In 2006, State Street trading services revenue was $862 million, up 24 percent from $694 million in 2005.

State Street shares fell 94 cents, or 1.3 percent, to $70.60 in New York Stock Exchange trading.

Ross Kerber can be reached at kerber@globe.com.