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August 31, 2003

Sellside Pays for Buyside OMS

By Peter Chapman

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For Some, Plan Could Eliminate License Costs

Order management systems for free? That scenario is not unlikely in the near future. Right now some vendors of buyside OMSs are moving to replace their traditional licensing models with pricing based on outbound order flow. If successful, the move could transfer nearly all costs associated with purchasing an OMS from the buyside to the sellside.

Leading the trend, according to sources, are Macgregor and Eze Castle, two of the top four vendors in the Boston-based industry. Charles River, a third upper tier player, says it would likely move to a transaction-based model if the rest of the industry does. LongView, fourth in the pack, says it has no plans to change. SunGard, which markets the Decalog brand, is seriously considering the move, execs at SunGard said.

Traditionally, buyside OMSs are licensed to users via multi-year contracts. Users pay in the hundreds of thousands of dollars. Vendors who supply connectivity also charge a flat monthly fee per connection. That can range from $100 to $500. The license fee is paid by the buyside user or softed to the sellside. The tab for the connection is picked up by the sellside.

"Over time, I could see a scenario in which OMS vendors get paid less in the traditional fashion for software," said Tom Driscoll, vice president of sales and marketing at Charles River, "and more in a fashion associated with the amount of business going through their system." Those revenues would likely come from flat fees or commissions, Driscoll added.

Perhaps the most talked-about move to alter the pricing structure is coming from Eze Castle, a vendor specializing in hedge funds. Eze is attempting to replace the fixed connection fee associated with its Eze Connect service with a variable per-share charge.

To do so it must convince some very large brokers to pay considerably more than they do today. Not surprisingly, Eze is meeting resistance, according to sources.

Customers of Eze say they have been told to expect a significant reduction or elimination of their annual software license fee if the new plan is successful.

"In moving to this [transaction-based] model, Eze is expecting our annual license fee to basically go to zero," said Dave Brooks, head trader at Boston Company Asset Management, Eze's largest customer. "Because that is what the other OMS vendors are doing."

Dave Quinlan, Eze's chief executive officer, says his firm's stated goal in introducing the new pricing scheme is to "allow our connectivity matrix to grow." But Quinlan adds it is not unlikely in the near future for an industry move to a license-free, transaction-based model.

"One of my biggest concerns," he says, "is some day I will wake up and hear that some big conglomerate with a big transaction engine goes out and buys or builds some kind of OMS product. They could then say [to their customers]: If you take this OMS product and do a certain amount in commissions with us, then we could discount it or give it to you free.' I don't doubt that is a possibility out in the future."