OMS Vendors Eye the Buyside
The Execution Needs of the Buyside and Sellside are Beginning to Overlap
August 2007
In April, sellside order management system vendor Fidessa bought LatentZero, an aggressive purveyor of buyside systems for large asset managers, for $126 million. The acquisition surprised industry watchers. In recent years, London-based Fidessa has forged deep inroads into U.S. broker-dealer territory traditionally dominated by SunGard's Brass OMS, while LatentZero focused on the buyside.
So why would Fidessa enter a new market? The trading world and the relationship between the buyside and sellside are changing, but that doesn't mean Fidessa can combine the
two OMSs for customers and bank the savings in technology and infrastructure costs. OMSs for investment managers and brokers serve different gods and support a slew of different functionality for their users.
However, "the execution needs of the buyside and sellside now overlap," says Fidessa chief executive Mark Ames. And therein lies the reason for the Fidessa-LatentZero deal.
The Systems
Sellside OMSs are traditionally systems used by brokers for order management, order entry, routing executions to market centers, and tracking fills and positions. They also provide compliance capabilities and capture the desk's P&L. Sellside OMS providers need vast connectivity networks to enable brokers to route orders to and from customers and other brokers, and to ship orders to market centers and receive execution results. The OMSs must also take in market data from various sources and stream that data into desktop applications.
Buyside OMSs, on the other hand, typically provide portfolio management functions, order management for traders, some light risk management functionality, and compliance and back-office capabilities. OMSs for the buyside also typically have large networks and connectivity that allow orders to be sent from institutions to a vast array of brokers, and fills to come back and populate the OMS.
But what's now vitally important on both sides of the aisle-buyside and sellside-is super-fast access to market data and markets, and powerful, low-latency execution platforms. The same execution management systems are being used by both sellside and buyside firms to execute orders quickly, without the need to support large databases and other order management applications. Orders have traditionally been sent or "staged" to these EMSs, but EMS functionality is increasingly integrated into traditional OMSs.
Fidessa's purchase of LatentZero is different from other buyside OMS acquisitions. Investment Technology Group grabbing Macgregor, Bank of New York acquiring Eze Castle Software and similar deals were examples of brokers snatching the heftiest piece of real estate on buyside traders' desks. The brokers could then tailor their trading and execution-related offerings to the acquired platforms.
But Fidessa isn't a broker. It's a technology vendor that now owns a sellside OMS, a buyside OMS, an execution management system from each company (Fidessa has an EMS integrated into its OMS as well as a stand-alone EMS for buysiders), a routing network and various other applications. Eventually, Ames says, the execution platforms integrated into the Fidessa and LatentZero order management systems will be the same, although they may be used by and represented to the buyside and sellside differently.
OMS Expanded
By owning both buyside and sellside OMSs and a common integrated execution platform, Ames says, Fidessa will eventually be able to offer more sophisticated interactions between traders for indications of interest, trade advertisements, and real-time pre- and post-trade analytics. "Controlling the technology on both sides will give us a great advantage through the understanding we'll gain and the ability to shape the interfaces," he adds. That could improve execution quality and the information flow between buyside and sellside firms.
On the OMS side, some of the technology to support multiple asset classes could be transferred from one OMS to the other. "LatentZero's knowledge in different asset classes is the direction we're going on the sellside, so we can leverage that to help the sellside cover more asset classes," Ames says. "We can help the sellside expand the geography and depth of coverage they have in different products-and represent those services better to their customers."
LatentZero supports executions in a range of asset classes, including fixed income and over-the-counter derivatives. Fidessa's forte lies in global access to exchange-traded cash equities.
Getting There
LatentZero also had a powerful reason for the Fidessa deal. Its comprehensive front-office Capstone product has done well with large-scale installations at big investment firms. It boasts nine out of the top 10 tier-one firms, including Alliance Capital and State Street Global Advisors. Capstone includes the Minerva trading and order management system, Tesseract for portfolio management and Sentinel for compliance. The Minerva system competes primarily with Charles River Development's Investment Management System and Macgregor's XIP, which ITG bought in 2005.
But what LatentZero lacked-and what is critical for institutions as buyside traders take greater control of their order flow in a technology-focused environment-is a routing network. Buyside firms using LatentZero's Minerva have had to arrange for their own connectivity. Unlike its competitors with large networks, LatentZero's deficiency on that front frustrated some customers.
LatentZero co-founder Dan Watkins acknowledges as much. "Clients want a single managed solution," he says. "Having a sellside transaction network is an advantage." Indeed, LatentZero last year said it would white-label another firm's routing network to offer customers this service, according to Watkins. With the Fidessa acquisition, LatentZero gained a network.
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