To Have and to Hold

Wall Street & Technology : By Larry Tabb: "The acquisition of Macgregor, the buy-side order management system (OMS), by ITG, the agency broker and transaction cost analysis provider, has stirred the market over the need for a front end. Should firms spend money either to build or acquire client-facing front ends? Or, do firms stay front-end agnostic, partnering with a few select platforms for greater integration, but allow all others to connect via a FIX connection?
Among those in favor of a front end, we have ITG (of course), Goldman Sachs, Morgan Stanley, Instinet, CitiGroup, BNY Securities, Bank of America and others that either have built or acquired front ends. Their view is that by owning the front end, they will be able to better control the user interface, add more-efficient tools and functions, make it more difficult to be disintermediated by another execution platform and, in the meantime, get a larger-than-normal percentage of order flow.

The contra side, however, argues that, first, the cost of either acquiring or building a front end far outstrips the revenue opportunity; and second, that eventually a broker-neutral, independent platform will win the platform wars as buy-side firms can't pay only one broker, won't put all their trades through a single broker-owned platform and don't want the hassle of implementing seven different broker-sponsored platforms.

While the optimist in me says that vendors such as Portware, FlexTrade, UNX, Realtick, FutureTrade and other independent platforms will be the prime choice for catering to the buy side, the paranoid/pragmatic part of me knows that every firm has its price. Given the valuations of firms such as Lava and Macgregor, the only thing separating the independent platforms from broker ownership is a larger customer base and a higher valuation.

For those of you looking to own an OMS front end, it's a tough business. Buy-side OMSs have the distinct challenge of needing to be everything to everyone, including a very differentiated community of users that often obtains services in lieu of commission payments. Also, it's a highly competitive market with six to eight healthy alternatives, and, besides the competition, buy-side OMS platforms need extensive configuring to facilitate compliance, connectivity and workflow integration; they need to be multiasset, multiproduct and multicurrency.

Further, once these rigorous platforms are implemented, they are difficult to switch out, as implementation times can take six months to a year. This issue of leverage is one of the downsides of owning an OMS - the difficulty of switching platforms puts the independent OMS at an advantage. While modest maintenance fees provide the OMS with incentive for managing client relationships, for most major OMS providers, the loss of a single client or two is not a major concern.

However, couple a $200,000 or $300,000 maintenance budget with a multimillion-dollar brokerage relationship and leverage cuts the opposite way. Frustration in fixing bugs and delivering OMS enhancements easily could be channeled through reallocation of order flow, exerting much greater pressure to heighten the service level. In addition, what happens when the buy-side firm says, "With all the business I give you, why am I still paying for software maintenance?" Again, leverage may not necessarily benefit the OMS provider.

So, while I actually think that ITG buying Macgregor is a good thing, I don't think it implies open season on OMSs. While the product and services benefits of owning an OMS can be tremendous, they could come at a high risk, and repercussions can be severe. Brokers beware.

Larry Tabb is founder and CEO of Westborough, Mass.-based TABB Group, a financial markets strategic advisory firm."