The buyside order management industry is moving deeper into the network business. Two of the biggest vendors – Charles River Development and Linedata Services – have started offering comprehensive connectivity services to money managers who use their OMSs. The moves bring to at least five the number of U.S. vendors making connectivity between the buyside and the sellside a significant part of their offerings, according to Traders Magazine research.
"Consolidating onto a single network makes it easier to provide the level of service we think our clients expect," says Tom Driscoll, vice president of sales and marketing at Charles River Development. "There are literally hundreds of new ATS, ECNs and brokers that we have to deal with today. Ensuring there is reliability requires a lot of testing and certification."
Neither Linedata nor Charles River actually owns or "runs" a network. They have contracted with the telco-like Transaction Network Services (TNS) and Radianz, respectively, to provide the actual pipes and physical and logical connections. TNS and Radianz actually transmit traders' FIX messages over their point-to-point networks.
While TNS and Radianz manage the "physical" network, Linedata and Charles River manage the "functional layer." They test, certify, support and maintain the connections between the buyside and the sellside. By formally taking on those tasks, the vendors relieve the buyside (and the sellside to some extent) of any obligation to do so.
Until recently, most order management vendors chose not to operate networks. They were software developers and nothing else. They and their customers relied on independent network providers for connectivity to the sellside. Only Macgregor, the oldest of the OMS vendors, offered its customers a proprietary network.
The situation began to change last year. That's when vendor Eze Castle Software, partly owned by Goldman Sachs, teamed up with Goldman to more closely integrate with Goldman's REDINet. REDINet became Eze's defacto proprietary network.
To cement the relationship, Eze, in a controversial move, changed its pricing policy. Its Eze Connect service would now charge on a transaction basis, or per share, rather than per connection. The deal was structured, sources say, to favor REDINet over competing networks. The upshot is Eze, like Macgregor, has been able to augment its software license fees with a new source of revenue.
And, in the buyside order management industry, every source of revenue is welcome. The cottage industry is extremely competitive with about ten vendors fighting over a relatively small pile of cash. The buyside is notoriously reluctant to spend money on technology. In 2004, the OMS industry had revenues of $90 million, according to industry consultant Celent Communications.
Other OMS vendors have also considered turning to network operators in order to rake in some of that cash, according to industry sources. Alan Schwartz, general manager of the financial services division of TNS, has witnessed their demands first hand.
"We've been in discussions with every single OMS and trading system in the past six years," Schwartz says. "Up until our deal with Linedata, no one really looked at it properly. All they wanted to do was to convert and take revenue from their customer base that was sitting on our network. And/or take our pricing. And make it so we were no longer making money. They saw it as their revenue stream."
TNS turned them all down except for Linedata, which, Schwartz says, is not looking for a revenue grab. Linedata's pricing is "standard," according to Annie Morris, Linedata's senior vice president for product strategy and client services.
Charles River is taking the most aggressive position of the two OMS vendors. Driscoll calls the Charles River Network a win for the vendor and its customers, but bad news for the independent networks.
"The middleman is in a precarious position," he says. "Connectivity is becoming such a commodity that there won't be the revenue they need. It's going to be given away by order management vendors."
There are five major middlemen. Thomson Financial, Reuters/Bridge and NYFIX operate hub-and-spoke networks. These three take messages into a central hub from multiple trading counterparties and then forward them on to multiple counterparties.
TNS and Radianz operate point-to-point networks. These establish dedicated connections between two counterparties. Messages travel direct from a single buyside desk to a single sellside desk, or vice-versa. Messages are: orders and cancellations (buyside to sellside), and indications of interest and trade reports (sellside to buyside).
Is the middleman an endangered species? "That's baloney," says Schwartz. "The idea that you can go into the network business and make a pile of money means you are ignoring the facts. I don't believe any OMS vendor can restrict their customers' choice of networks even if they are creating their own. There are too many networks out there."
Schwartz adds that Macgregor had an advantage when it started its network in the late 1990s because there was very little competition. Such economics are not present today, he says.
Charles River, which sells the Charles River Investment Management System, supports customers on five different networks, according to Driscoll. While it is not pushing its customers to adopt its new network, Driscoll says, it is welcoming them with open arms. "We would love to have them," he adds.
Linedata, which sells the LongView Trading System, is also not pushing its existing customers too hard to switch. But it expects the majority of its new clients to sign on to the LongView LyNX network.
In contrast to CRD, Linedata says its customers are the reason for its move into the network game. "Some clients, but not all," says Morris, "have requested a bundled product for trading that includes both software and connectivity."
Linedata's network play is partly driven by its move to market an ASP version of its order management system. Money managers without the funds, or the desire to host their own system, can now gain access to LongView on a time-share basis. The arrangement necessitates they contract out the connectivity to LineData as well.
Maintenance and monitoring are the two biggest operational chores the buyside faces when setting up connections with its brokers. Point-to-point networks especially require a lot of maintenance work on the part of the buyside, according to Morris. The buyside must set up multiple connections and FIX certify every destination.
Under their initiatives, Charles River and Linedata will certify the connections as FIX ready. FIX has become the standard communications protocol for sending trade messages, but not every FIX engine understands every other FIX engine every time.
As part of the new service, the vendors say they will ensure their FIX engines communicate with those of the brokers.' Linedata uses a proprietary FIX engine while Charles River uses CameronFIX.
The vendors will run certification tests at both the time of the initial hook-up and when either they or the brokers make changes to their FIX engines. "This is a big benefit for the sellside," says Morris. "We ensure the two pieces of software their FIX engine and ours work together. It also means no surprises for the buyside."
Charles River's Driscoll echoes her comments. When it comes time to certifying against the sellside, "we'll do our best to make sure they work on other networks, but we guarantee they'll work on our network," he says.
Monitoring is also an issue. If a problem arises, the buyside may have to make several phone calls to solve it. Now, "they simply call us," says Morris. The vendor will work with the broker to solve a problem, rather than involve the buyside desk as well. Problems can be compounded if there is a hub-and-spoke network in the middle, notes Morris. That's because there is a third FIX engine sitting between the vendor's and the broker's. "You must make sure all are coordinated," Morris explains.
A common problem is when the hub-and-spoke service interprets a message differently than the FIX engine that sent it. Or it might not support all the functionality that the OMS does. "It's very important for us to use point-to-point in order to roll out new features quickly," Morris adds.
Driscoll, not surprisingly, finds fault with the hub-and-spoke systems as well. "If the protocol being used isn't pure FIX," he says, "some of those FIX message tags can get lost. It can be especially problematic when you get into things like algorithmic trading. There are all kinds of exceptions to the FIX protocol." Both Charles River and Linedata have help desks staffed with 15 to 20 people. That's similar to Macgregor.
So, what does the buyside think of the vendors' approach? "On the one hand, a buyside firm can reduce its IT support requirements if the OMS vendor manages this," says Scott Atwell, manager of FIX connectivity at money manager American Century. "On the other hand, being solely dependent upon a single network managed outside of your control carries with it certain costs and limitations."
Specifically, Atwell notes, a buyside desk would be out in the cold if a particular broker is not on the network. Also, "placing one's eggs in the same basket' might be perceived as an operational risk," Atwell adds.
Not every order management vendor sees establishing a network as a solution to the problems of the vendor and the customers. LatentZero, for instance, says it has a plan to improve the testing process, but is not ready to take on the same level of responsibility as some of its competitors.
The British shop, whose Minerva OMS is now finding success in the U.S., is hammering out a scheme to use its own testing system to relieve its customers of much of the work.
"End to end testing is really important for us," says Patrick White, LatentZero's U.K.-based business development manager. "So we're trying to determine how much we can do ahead of time, rather than have the clients go through the certification sequence themselves."
The point is to do the testing regularly, so when its customers and their brokers are ready to do something new LatentZero is also ready. The initiative would help the vendor deal with Wall Street's ever-proliferating menu of trading options such as algorithms, according to White.
As it stands now, testing is typically done on an "ad hoc" basis, the exec says. White won't discuss the specifics of LatentZero's plans, but does say they are in an "advanced state." The exec maintains that, if it was necessary to build a network in order to do comprehensive end-to-end testing, LatentZero would build one. "But we don't believe we have to," he says.
A Look at One OMS Strategy
Advent, which markets the Moxy order management system, has a strategy that probably falls in between that of LatentZero and the vendors with networks. Since 2001, Advent has had an agreement with SunGard to offer its customers connectivity over the SunGard Transaction Network (STN).
"SunGard is our certified network," says Mary Jo Abbott, product manager for straight-through processing at Advent. Certification, monitoring and support for those clients on STN is handled by SunGard, not by Advent.
Mike Gamson, head of trading and compliance at Advent, notes: "We have a deep relationship with SunGard. That's really where the bulk of our activities go as far as our connectivity strategy. We are fully behind that network."
However, Gamson is quick to point out that Advent does offer other connectivity options and does not push its clients towards SunGard. It maintains a staff that does the certifying and upkeep for buyside shops that choose other networks. "We are generally an advocate for SunGard," Gamson adds, "but we don't have a blanket statement where we recommend them."
