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February 1, 1999

Order Management's BIG Room for Growth: A Fourfold Increase in Global Spending Is Predicted

By John A. Byrne

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  • Order Management's BIG Room for Growth: A Fourfold Increase in Global Spending Is Predicted

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.