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.
Fidessa’s acquisition of LatentZero also reflects broader industry changes as the power of the purse shifts toward the buyside. “There’s more opportunity on the buyside and a bigger potential client base for technology firms,” notes Sang Lee, founder of Aite Group, a financial services research firm in Boston. He points out that sellside consolidation and shrinking opportunities in cash equities have crimped big profits for brokers: “That makes the sellside OMS market pretty tough, especially if a firm’s focus is mainly on equities.”
In 2006 overall industry spending for OMSs and EMSs was $1 billion, according to Aite Group. Sellside OMSs accounted for 47 percent of the total. In 2010, Aite predicts, spending will rise to $1.2 billion, but the portion devoted to sellside OMSs will decrease to 41 percent as buyside OMSs and EMSs gain ground.
Jim Leman, a managing director at Westwater Corp., a management and technology consulting firm in the financial services, points out that although the sellside and buyside have different execution needs, industry changes have created common ground for an execution platform. He notes that a number of EMS platforms are used by asset managers and hedge funds as well as broker-dealers. Some of these are Portware, FlexTrade, TradingScreen and InfoReach.
“Vendors [to the sellside] must realize that their customer population may decrease or change its needs dramatically, and they may not want to be caught flat-footed,” Leman says. For technology companies, expanding to the buyside diminishes that risk.
Crossing the Aisle
Among the many OMS providers, Bloomberg is alone in having long had offerings for both buyside and sellside clients. Its OMSs are built around its omnipresent Bloomberg data terminal. In addition to its sellside OMS, which allows trading of multiple asset classes, Bloomberg has OMSs for traditional buyside firms, hedge funds and fixed-income players. The firm also has an EMS for buysiders.
Like Fidessa, other big sellside OMS vendors are now scoping out the buyside arena. Even SunGard’s Brass, the largest sellside OMS provider in the U.S., has retreated from its sellside-only stance. Brass has 150 broker-dealer clients. Broker Direct U2, the firm’s execution platform, integrates with Brass.
Earlier this spring, Raj Mahajan, president of SunGard’s Brass business unit and SunGard’s trading business, was adamant that Brass would not be distracted from its sellside-only focus. Now, SunGard could consider acquiring an OMS or EMS that serves the buyside. “We’re in strategic conversations with a number of firms about what makes the most sense from a business perspective going forth,” Mahajan says.
The Competition
NYFIX, a broker and electronic trading services provider, is also looking over the fence, although indirectly. The firm’s separate OMSs for market making and sales trading cater mainly to mid-tier brokers with eight to 25 traders. Recently, NYFIX began enabling brokers to sponsor FIXTrader OMS, its listed equities sales trading application, to buyside clients.
GL Trade, globally the largest sellside OMS vendor and a dominant network and market data provider, acknowledges that it, too, is assessing the buyside landscape more closely these days. The Paris-based firm’s GL Stream OMS has 700 sellside clients, primarily in Europe. Like Fidessa, it now also has an EMS for institutions.
“Our strategy is to move toward the buyside,” says Christophe Dacre Wright, deputy CEO for GL Trade Americas. “They’re clients of our core clients and we need to know what they’re offering, not just to sell to them directly, but to help our sellside clients meet the new demands of the buyside world.”
More Options
While sellside OMS vendors are starting to make eyes at the buyside, the largest are also expanding their product coverage for broker-dealer clients whose buyside customers are demanding more. The goal is to prevent their sellside customers from turning to third-party EMS platforms to meet their shifting execution needs.
SunGard’s Mahajan notes that his firm is trying to help sales traders-under pressure from the encroaching capabilities of electronic trading and shrinking margins-reassert their relevance to customers. “They must add value through research or interesting ideas for executing trades, instead of just suggesting a long/short position in IBM-and that can’t be done without knowledgeable traders and the execution technology to back that up,” he says. “We have to add to our product set to make traders more profitable.”
For months now, SunGard has worked with one of its largest clients and MicroHedge, an options trading and market-making platform provider within SunGard’s trading business, to develop a full-scale options trading capability to be integrated into Brass’s platform. The firm plans to roll out the new options functionality this fall.
Fidessa isn’t too far behind. The firm says it is developing an options trading capability with all the requisite analytics that will launch early next year. Fidessa execs say brokers increasingly demand access to the options market.
