The terms of the deal, which is subject to regulatory approval, were not disclosed.
Merrill, along with a few other big traditional brokerage firms, has been slow to move into the booming online trading market. The firm's Net efforts have been held back partly by fears that discount trading would eat into its brokers' commissions.
Meanwhile, Charles Schwab and Donaldson Lufkin & Jenrette have created separate units to handle online trading, and other major brick-and-mortar brokerages are looking for ways to integrate Net trading into their existing businesses.
D.E. Shaw Financial Technology (DESoft) develops real-time, online trading systems, and sophisticated database applications.
Sources close to the transaction said the price was between $25 million and $35 million, according to reports.
"The acquisition of DESoft underscores Merrill Lynch's commitment to providing our clients with a total financial relationship," John Steffens, head of Merrill's private client group, said in a statement.
However, today's purchase does not necessarily mean that Merrill is jumping straight into the cut-throat, low-commission world of online brokerage firms. The firm has been embroiled in an internal debate as executives and brokers try to decide how to integrate online trading into its core brokerage business.
Still, some analysts see today's acquisition as an indication that Merrill plans to move online more aggressively than previously thought.
"I'm thinking that their online trading will be more widely spread," said Timothy Klein, an electronic commerce analyst at investment banking firm Piper Jaffray. "If they just wanted the ability to do some trades online, I don't think they would have needed a system so robust."
Demand for online trading is booming and is expected to rocket even more. In 1996, the number of online trading accounts totaled 1.5 million, according to Forrester Research. The total is expected to soar to 12.7 million in 2001.
Recently, several online brokerages, including E*Trade and Ameritrade, have again experienced crashing systems , preventing users from trading. In some cases, the technical problems were caused by the exploding number of users trying to access accounts during volatile trading sessions.
"In light of the recent challenges for existing online brokerages, [Merrill] probably realized that while their system was fine, it wasn't as robust or scalable as they would have liked," said Klein.
Merrill has been beta testing online trading for its fee-based Merrill Lynch Financial Advantage and Merrill Lynch Asset Power programs. But the launch has been delayed several times in past two years.
"The combination of a premier Internet site, a full spectrum of products and services, and the unmatched guidance of our financial consultants is the ultimate marriage of technology and human wisdom," Steffens said.
The Shaw unit would bring about 30 computer engineers to Merrill as well as database software vital for its Internet services.
"The DESoft development team and state-of-the-art technology will dramatically enhance Merrill's online resources," Steffens added.
Merrill plans to offer online trading services for some clients with fee-based accounts before the end of March.
Shares of Merrill jumped 2.77 percent to 71.81 in morning trading. The stock has traded as high as 109.13 and as low as 35.75 during the past 52 weeks.