DeFeo Makes an Exchange Play

The New York Stock Exchange's recent transformation into a public company is just a small part of a bigger revolution on Wall Street, asserts Phil DeFeo. The former Pacific Exchange chairman isn't just idly philosophizing. He's betting $500 million on what he expects will be years of upheaval in everything from the way exchanges operate to the kinds of securities they trade.

"This area -- the infrastructure functions that surround the financial services arena -- is really on the cusp of dramatic change," says DeFeo, 60 who has teamed up with veteran buyout executive David Chow to launch Lithos Capital, an investment fund that will focus on the sector. DeFeo and Chow, formerly a partner at private equity shop Castle Harlan, are pooling their own money with funds contributed by venture capital firm Vestar Capital to invest in venerable securities exchanges as well as in fledgling back-office service providers.

Lithos will focus on companies active in securities trading and processing, which DeFeo believes is in its infancy. Backing new trading technologies could prove particularly lucrative as investors demand faster and more transparent systems on which to execute complex strategies. "The products that trade are going to change and become more standardized, and electronic trading will become more universal," he predicts.

DeFeo has already demonstrated an aptitude for shaking up markets. Under his leadership, the Pacific Exchange became the first registered U.S. securities exchange to transform itself from member-owned cooperative to for-profit company. Last year he oversaw the sale of the 123-year-old exchange's options-trading business to Archipelago Holdings, the upstart electronic trading firm that five years earlier bought its stock-trading division. Archipelago has since been acquired by the NYSE in the deal that brought the 214-year-old Big Board public.

"We have already made a difference in the exchange space," says DeFeo. "Now we are in the position to do more, in more places."