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April 21, 2005

Buyside and Sellside: OMS Links

By Peter Chapman

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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.