About eight years ago, as the number of execution management systems on offer from brokers mushroomed, buysiders found themselves with more systems on their desktops than they needed.
What they wanted was one system that gave them access to multiple brokers. What the brokers wanted was for their customers to use their platforms to access their own services exclusively.
The two positions were at odds with one another. Finally, one side prevailed.
And it was the buyside. Its discontent drove the spread of the broker-neutral platform-a system that could be used by asset managers and hedge funds to trade with multiple brokers.
BROKER NEUTRALITY
All brokers, including Goldman Sachs, professed to supply broker neutrality, but many didn’t. Sources tell Traders Magazine that Goldman actively discouraged its customers from routing their orders to its competitors.
As broker neutrality gained in popularity, Goldman Sachs had to make a decision: Let its REDI division become an independent firm and grow. Or keep it in place as a service of Goldman Sachs, and risk obsolescence as the market moved away from its business model.
It chose the former. According to Rishi Nangalia, CEO of the technology provider now known as REDI Holdings, the buyside was clamoring for so-called “broker-neutral” execution management systems, so the umbilical cord to its parent had to be cut.
“We listened to market trends and clients’ demands for an independent, multi-asset EMS solution, but also to preserve the strategic relationship with the sellside,” Nangalia said. “This resulted in us partnering with several significant industry participants to deliver an innovative and uniquely positioned broker-neutral solution to the broader financial community.”
He added that the buyside said it wanted a single experience across all brokers, and this was something REDI couldn’t offer while at Goldman-too many other brokers saw Goldman as competition.
The buyside, Nangalia said, said it did not want eight different systems to trade with- just one or two. And this is where independent vendors like REDI are making inroads versus the brokers’ own systems.
Ready or not, REDI has taken the plunge and become an independent firm. It was a decision that took years to fully implement.
Amid the commission slump, contraction in equity trading volumes and an overall decrease in the amount of cash the sellside had to spend, Goldman Sachs spun off its REDI trading technology unit to five new investors. These include brokers Bank of America, Barclays, Citadel Securities and BNP Paribas. Private equity firm Lightyear Capital rounds out new consortium ownership.
Details of the sale we not publicly disclosed. However, Goldman Sachs remains a “significant minority” investor in REDI, with less than a 50 percent interest.
“We are pleased to assemble an impressive consortium of market-leading participants to support the further growth of the REDI business and expand its reach to more clients, geographies and asset classes,” said Darren Cohen, global co-head of Principal Strategic Investments at Goldman Sachs in a release. “The new independent REDI is a strategic initiative for Goldman Sachs and the firm is committed to its future success as a separate, multi-dealer platform.”
The new firm was reborn as REDI Holdings, an execution management system vendor. It has 800 active clients who use the platform routinely and another 800 who use it as a secondary system or as emergency backup.
REDI Holdings’ main asset is the REDIPlus execution management system. The technology provides access to algorithms and routes orders to trading venues and brokers. The multi-asset EMS allows buyside to trade equities, futures and options. It competes with other execution management systems such as ITG’s Triton, Instinet’s Newport, Morgan Stanley’s Passport, J.P. Morgan’ Neovest, Eze Castle’s RealTick and Bloomberg’s EMSX.
FREEDOM OF CHOICE
REDI also operates a registered broker-dealer, REDI Global Technologies. Nangalia told Traders Magazine that being a regulated entity obliges REDI to have a much higher bar regarding client confidentiality, process and procedure, and makes it a more robust organization. It also allows REDI flexibility in its business model and how it charges for services.
See Chart: EMS Providers
“We do not intend to use the broker for any execution of trades or business that conflict with our clients,” he added. “Brokers just wanted to put their algos on REDI and become a partner with us, as they saw value in this.”
Now, after getting an inflow of consortium capital and staff, REDI provides the buyside with a single entry point for its orders, and yet offer algorithms and trading technology from several brokers, as opposed to just one.
Under Goldman, REDI offered access to most other brokers’ services. Now, as an independent, the vendor is in the process of signing up those brokers who previously saw no value in offering access through REDI, or who were discouraged from giving their customers access. Morgan Stanley, which offers the Passport system, was a notable holdout.
Nangalia would not disclose the names of the brokers he is in talks with, but did note that REDI is exploring new opportunities with its partners.
“BoA is bringing InstaQuote into us,” he said. “Barclays BARX platform has some products we’d like to bring onto the REDI platform. We’re doing some collaboration with Citadel through their Citadel Technologies unit, and BNP wants us for distribution in the U.S. We have some strategic initiatives with each of our investors.”
All in all, REDI has more than 100 brokers on its platform and is actively in discussions with others to join, he said. REDI was in negotiations with one major broker at presstime.
Of the four outside brokers in the consortium, only one, Bank of America Merrill Lynch, had operated an EMS. For BoA, the change in REDI’s ownership structure was a welcome one.
According to John Werts, head of Merrill’s broker-dealer execution services, increased competition and providing the buyside with more choices not only helps institutions, but aids the sellside too.
COST CUTTING
Sellside firms like BoA have been faced with increased costs for their own proprietary EMSs, such as InstaQuote or Barclays’ BARX platform. Now those firms can save money integrating or offering REDI to clients and redeploy cash to other areas of the trading business,
“For us, the REDI transaction has several benefits. These platforms have become increasingly difficult to run as stand-alone, single-owner businesses,” Werts said.
“It is challenging to maintain a platform like REDI or InstaQuote these days,” he said, “especially within a large company structure. There has been commoditization in this area, and the buyside wants to trade multi-broker, so it makes sense to have a consortium business model. Technology and regulatory expenses are not going down for any firms. The advantage to having a single broker-owned platform is diminishing.”
BoA’s Werts said existing InstaQuote clients will be migrated to REDI and will benefit from a better-capitalized platform with truly multi-asset and global capabilities. In addition to REDI, BoA will continue to support clients with a wide variety of EMS platforms based on their trading preferences.
Another broker source told Traders Magazine that the equities commission squeeze has forced the brokers to allocate resources toward other goals and away from technology platforms. The sellside, the source said, is trying to stay focused on becoming better liquidity providers and not technology shops.
Barclays, another investor in REDI, already offers its execution products via the REDIPlus platform for certain asset classes, according to a spokesperson. Thomas Chippas, Barclays’ head of prime services execution, said in a statement that under the new arrangement, its BARX offering available through the REDIPlus platform as an additional channel for its clients.
BARX is a suite of execution products that Barclays’ customers access via FIX or direct market access, or through a third-party EMS. Barclays hasn’t owned an execution management system since it sold its RealTick platform to ConvergEx in 2010.
TWO YEARS
According to Nangalia, the deal to spin out a piece of REDI was not a cost-cutting move. Rather, it was done strictly to make the platform more competitive.
This deal was two years in the works, as it took that long to build a company that could stand on its own feet, including moving from Goldman’s digs into its own location in downtown New York City. REDI brought in Josh Schubkegel, who spent nine years at UBS and one at hedge fund Bridgewater Associates, as the firm’s chief technology officer.
Two years ago, under the Goldman Sachs bunting, the firm was about 35 people strong, Nangalia said. Now it has grown to about 95, and as a result of the sale is taking on another 25 technologists from Bank of America’s InstaQuote division. Between 70 to 80 percent of REDI’s team are technologists, he added.
The additional capital and resultant risk-sharing among the consortium is already paying dividends for REDI, Nangalia said. Aside from getting experienced technology staff from BoA, the firm is already exploring collaboration opportunities with its new partners, such as tapping into their sales forces as a means of promoting REDI.
REDI is exploring growing its business model outside of U.S. equities, options and futures. Nangalia said the firm is looking at moving into foreign-exchange space and into new geographies.
“The brokers have the sales force and staff that can help REDI achieve this,” Nangalia said. “We have a built-in prospect list and pipeline that we can go after. If we, as a vendor, do a better job, then we can move higher in the pecking orders of vendors out there.”
For the buyside, having an established platform such as REDI and now being able to execute with its broker of choice is a positive. David Jennings, senior trader at Bridgeway Capital in Texas, said the ability to transact with multiple brokers on a platform already on a trader’s desktop is helpful.
“The move to a more agency model should be a positive,” Jennings said. “It should help, since broker-neutral is typically more convenient, due to the need for fewer systems/platforms, which can make the desk more efficient and reduce IT costs, since you are servicing fewer systems.”
He added that any agency-neutral platform still needs to be feature-rich and well supported, or it negates the convenience of having just one.
Robert Felvinci, director of portfolio management and trading at Spinnaker Trust in Maine, echoed Jennings and said that while having fewer broker-neutral platforms is desirable, it doesn’t change much for the cost structure of a buyside desk. But it certainly makes life easier.
“For the end user, it is all about screen real estate and convenience,” Felvinci said. “Having more than two similar execution systems on a desk becomes burdensome and wasteful. A buyside trader needs a primary system and a backup system in case the primary one crashes. Clearly, having a broker-neutral system is important, so that the buyside trader can pay any execution broker or soft-dollar broker they need to pay.”
Chip Coleman, director of trading at Thompson, Siegel & Walmsley in Virginia, said that as an independent company, REDI can now compete more effectively against other broker-neutral EMSs. More competition, he said, should translate into better buyside executions.
However, as some EMS vendors without the capital backing of a bank consortium might not survive, shrinking the list of providers-while good for REDI-might not be good for the buyside, Felvinci said. Fewer providers could eventually mean higher execution costs.
“Part of the steep fall in commission rates over the last several years was the low cost of trading electronically, as both the technology and the competition of so many players competing against each other drove down commission rates,” Felvinci said. “As the number of players decreases, it leaves just a few big players left that will have a better ability to control commission rates going forward.”
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