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January 3, 2011

Two Routing Firms Are Gone

By Peter Chapman

Two more suppliers of order routing services for broker-dealers and exchanges have shut their doors.

Order Execution Service Holdings and Selero, the last of a dwindling band of old-line connectivity providers, are no more. Both firms have disbanded in the past few months.

OES, a broker-dealer with at least 150 customers, based in Newark, N.J., collapsed owing creditors nearly $2 million. The firm was created in 2002 when management bought out the OES division of Herzog Heine Geduld, then a division of Merrill Lynch.

OES offered order routing and brokerage representation to both exchanges and broker-dealers, operating a network that spanned the marketplace.

The firm, which cleared through Merrill Lynch, made a name for itself with the onset of Regulation NMS. It won contracts with almost every exchange to act as their outbound routing provider, a necessity given the decommissioning of the Intermarket Trading System. The firm expanded into Europe as well as within the U.S. market, with compliance software and dark pool connectivity

OES's downfall came as a result of the financial meltdown of 2008. The subsequent slump in volume and prices cut into OES's revenues, sources say. As a broker servicing other brokers, OES made about one mil, or one-thousandth of a penny, per share before the market collapsed. With the cutthroat competition that followed, that rate dropped to as low as half a mil.

Unlike many execution-only brokers that have dealt with the slump this year by investing in value-added services such as research, OES stuck to its knitting. Because the brokerage was narrowly focused on barebones trade executions for brokers, it could not compete with such value-added players as clearing firms, sources contend.

OES made a last ditch effort to sell itself earlier this year. In March, it brought in former Lava Trading topper Rich Korhammer as interim chief executive officer and chairman to prime the firm for sale. At one time, Lava was both a competitor and customer of OES, operating an order routing network of its own. Korhammer spent a few months at OES, working with long-time OES CEO David Scheckel, but to no avail.

According to documents filed with the Financial Industry Regulatory Authority, OES Brokerage Services, one of three broker-dealer subsidiaries, and the former Archipelago Brokerage Services, owes an unnamed brokerage firm $1.9 million. Sources speculate the firm could be either Merrill or Penson.

In better days, in its quest for the outbound routing business of exchanges under Reg NMS, OES occasionally butted heads with both Lava and Selero. NYFIX was also a major competitor. Lava, now part of Citi, informs Traders Magazine that it is still in that business. Selero however has shut its doors.

Behind the demise of Denver-based vendor Selero, sources say, was a reluctance by brokers to contract for its Reg NMS smart routing services. "We were on the leading edge as far as smart routing, but demand wasn't there during the Reg NMS process," a former employee said. Rather, firms took a wait-and-see attitude that nullified any first mover advantage Selero held. The decision by a couple of large customers to balk at renewing their contracts with Selero also hurt.

Selero had its successes, including a win at NYSE Euronext in 2009. Through its Nunami broker-dealer unit, Selero acted as a back-up for the exchange operator's own outbound routing service. In that win, Selero displaced OES, the executive noted.

The collapse of OES and Selero brings to at least four the number of old-line connectivity providers that have vanished in the past year or so. NYSE Euronext bought NYFIX in November 2009, while order management vendor SS&C bought Tradeware in January.

While the reasons for the firms' demises vary, the forces impacting their core businesses are similar. Connectivity, including co-located hosting, has become cheap, sources say. That has made a commodity business even more so.


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