As a war of sorts heats up among electronic equity order-management vendors, there is this sobering thought: The business is still only maturing.
With sell-side firms spending about $50 million worldwide on outside support in 1997, the potential annual global sales for systems is some four times that sum, or about $400 million, according to a new report published by The Tower Group, a financial consulting and research firm based in Newton, Mass.
So while vendors are surreptitiously eyeing each others' customers, the experts say relax, the market is still largely untapped.
"In the U.S., the number of potential customers is large," said Bob Iati, a senior research analyst with The Tower Group, who authored the report. "Overseas, usage of order-management systems is small, while the need is huge as markets globalize and integrate, especially in Europe."
The Tower Group predicts the sums spent will decline ten percent by 2001 because of cutbacks in overall technology spending following last fall's sharp worldwide stock-market declines.
But an upward trend is predicted thereafter.
"External solutions [for equity order-management] will only become larger, as sell-side firms come to realize they can take advantage of the expertise represented by the market vendors," the report states.
The U.S. market is the most mature. In broad terms, service bureaus in the U.S. process trades for most of the small market-making and specialist firms, and some larger firms as well.
Conversely, The Tower Group states, large well-capitalized firms tend either to build internally or to lease software from external vendors. Forty percent use proprietary software while usage of vendors is becoming increasingly popular.
Either way, order-management systems make trade processing more profitable, eliminating much of the manual handling of equity trades as they pass from traders on the buyside to market makers and specialists on the sellside.
Typically, order-management systems integrate the backoffice with a trading desks' regulatory and management reporting, and provide real-time monitoring of position and profit-and-loss movements.
The Battleground
On the battleground is the industry's 800-pound U.S. gorilla BRASS, which processes an estimated 50 percent of Nasdaq trades for just over 160 customers, remaining the undisputed leader, despite somewhat extraordinary diseconomies of scale. BRASS does not generally support U.S.-listed business, though The Tower Group sees BRASS deploying more resources there.
The slate of BRASS clients includes Wall Street powerhouse Morgan Stanley, Dean Witter & Co., medium-sized firms such as Nesbitt Burns Securities in Chicago, as well as many smaller outfits. Most recently, BRASS, which is operated by Automated Securities Clearance Corp. (ASC) in Weehawken, N.J., set up an office and data center in London, where it is currently servicing two accounts.
Over the past few years, BRASS said only one broker dealer bolted for a competitor. A well-informed source said the customer has returned to BRASS and will likely be active on the network next month.
Last year, meanwhile, two accounts became one with the merger between Stamford-based SBC Warburg Dillon Read and Switzerland's UBS Securities.
Most vendors, naturally enough, expect to lose customers in a free-enterprise environment. But BRASS' potential losses in the future may be fueled more by its diseconomies of scale than by old-fashioned customer restlessness.
The Tower Group report notes: "BRASS may have grown too rapidly to cover all the demands on its system. Complaints from some current users about lack of support have led BRASS management to bring in an outside organization for evaluation."
According to experts, the fundamental reason for BRASS' diseconomies of scale is simple: a surging Nasdaq stock market and a network scrambling to keep pace with growing business. Conversely, its unrivaled volume practically guarantees BRASS a continuing supremacy.
The Tower Groups' Iati said some BRASS customers expressed dissatisfaction in two areas during research for the study: occasional though not frequent systems crashes, and a frustration with service.
Moreover, BRASS does not have a native Microsoft Windows NT front end, which some clients want. (For the benefit of technophiles, BRASS runs on a Microsoft Windows-based, SUN X-terminal on a PC, with full redundancy in technical architecture. The program is written in C using a SQL-based relational database. Order routing is FIX-compliant.)
One medium-sized BRASS customer contacted for this story dismissed reports of defections, noting that his desk is satisfied with BRASS service.
For its part, BRASS said it is committed to improving overall service.
In a recent letter signed by ASC president Robert Greifeld, customers were told that BRASS bureau capacity will be maintained at two-and-a-half times the requirements for each account. Capacity for a given 15-minute trading period will be ten percent of the volume transacted, the letter stated.
Clever Marketing
One thing is very clear: BRASS is a hard act for other vendors to follow. For starters, it employs a clever arsenal of marketing ploys. Among the arsenal: BRUT, the exotic electronic communications network (ECN) that pays users for liquidity, and BNET, which lets BRASS customers automatically or manually transmit orders to BRASS users.
For their part, BRASS competitors each operate either a service bureau, lease software or take both approaches. And each is eyeing opportunities in areas where BRASS may actually seem to have its strongest links.
Ironically, though BNET and BRUT give BRASS a strong edge as well as bragging rights, The Tower Group discovered an interesting twist: The competition is using them for competitive advantage.
"Customers who sign to BRASS get access to the order flow on BNET and discounted access to BRUT as part of the package," Iati said. "That's attractive."
But Iati said one BRASS competitor, who he did not name, is telling clients that while a subscription to BRASS does provide access to BNET and BRUT, it potentially restricts the clients' access to other ECNs. These ECNs would presumably view order flow on BNET with a skeptical eye.
Indeed, The Tower Group's study warns: "By developing its own ECN, BRASS has possibly jeopardized its ability to access the order flow of other ECNs. If access is thus restricted, the very liquidity that is needed for BRASS to succeed will be compromised."
Greifeld dismissed the assertion and noted that BRASS implemented an electronic data connection about five years ago with the largest ECN, Reuters Holdings' Instinet. "We have had a long-term relationship with Instinet and other ECNs," he said.
Indeed, insiders said BRASS is preparing connections to other ECNs, including consortium-owned STRIKE and Island, which is run by Datek Online Holdings in Brooklyn.
Nonetheless, people familiar with BRASS mention its rocky relationship with the Bloomberg Tradebook ECN. BRASS and Bloomberg do not have electronic links in part because of competitive fears raised by Bloomberg, these people say.
The Competition
BRASS' competitors in the order-management business are TCAM, which runs a service bureau and leases software, Trinitech, a service bureau operator, and Fidessa, which leases software.
BRASS' main challenger so far is said to be Fidessa, owned by London's Royalblue Technologies. Fidessa has two of its 30 global clients leasing software in the U.S for Nasdaq business. Trinitech, owned by Stamford-based Trinitech Systems, has 65 U.S. clients, but only services listed business. (It is rumored to be exploring the Nasdaq market.)
Fidessa, which is widely used in Europe for cross-border cash equity trading, penetrated the U.S. market with the acquisition of ATI, a Nasdaq boutique specializing in the wholesale market. Since early 1998, it has been supporting U.S. Nasdaq and listed trading at San Francisco-based Nationsbanc Montgomery Securities, and recently nabbed New York-based SG Cowen.
Meanwhile, TCAM's service-bureau approach for Nasdaq business is no match for either BRASS or Fidessa, according to industry sources. The Tower Group notes that TCAM's bureau, which serves 20 U.S. clients, has strong routing capabilities and service, but the platform is old. The vendor is a unit of TCAM Systems in New York.
Though each vendor has different methods for calculating fees, according to The Tower Group, the basic structure amounts to a monthly per-terminal charge of $1,000 in addition to $500 for connections to backoffice systems and ECNs.
Installation on a sales desk or a remote client site costs from $250 to $500, while a sliding scale fee of $1.25 down to 50 cents is charge for executions.
Based on these figures, BRASS is clearly a cash-cow machine viewed with envy by outsiders. The Tower Groups' Iati said BRASS has the benefit of being a brand name on Wall Street trading desks. "No trader ever got fired for using BRASS," he explained. "People talk about it all the time. When a new trader starts at a firm, BRASS will be the first order-management system on the tip of his tongue. It's a brand name like Kleenex [tissues.]"
