In the beginning, there was BRASS. For over a decade, the sellside order management system sold by SunGard Trading Systems was ubiquitous on Nasdaq trading desks. So-called Brass-killers' came and went. SunGard maintained its grip on the notoriously demanding market and even expanded into the listed side.
But in the past two years, things have started to change. Royalblue, a British vendor in the states from the mid-90s, has finally started to gain some traction. Last year, its Fidessa system scored big wins in the trading rooms of Merrill Lynch and Bear Stearns.
Bloomberg L.P., the market data giant, entered the low end of the market, taking advantage of the industry's hard times and its need to cut costs. With the bear market and penny ticks cutting into Nasdaq dealers' profits, a Bloomberg package of market data and order management for $1,350 per terminal per month sounded good.
Bloomberg's purpose in offering an OMS to small and mid-tier sellside equity trading desks was to sell more terminals. The vendor, best known for its news, prices, and analytics, was having a tough time cracking the lower echelons of Wall Street.
Bloomberg long ago saturated the upper tier. For the bulge bracket, the Bloomberg is a must-have. A typical bulge shop has placed the terminals in front of most of its equity traders. But for the smaller shops, $1,350 is too much to spend on every trader.
So, in order to win over the less-rich, Bloomberg added an OMS to the mix. The package has proved irresistible to 30 firms in the U.S. and five in Europe, according to Bloomberg. Of the 30 U.S. customers, about 10 ditched BRASS and four ditched NasdaqTools, Nasdaq's ill-fated venture into order management.
Not all of Bloomberg's customers are small. Although it has its share of Delafield Hambrechts and B. Rileys, the vendor recently landed Southwest Securities, a large regional in Texas. Bloomberg also boasts Pacific Crest, May Financial, a unit of Southwest, Wedbush Morgan, and Howe Barnes as customers. Wedbush was the first. Southwest, B. Riley and Howe Barnes are also users of Bloomberg's fixed income OMS.
Despite Bloomberg's progress, its OMS is not nearly as sophisticated as BRASS or Fidessa, according to some trading pros. It lacks much of the functionality demanded by the larger trading shops. That's listed trading, multi-capacity Nasdaq trading and single-screen market center aggregation.
Running the vendor's sellside equity OMS operation are Adam Ross, formerly a compliance exec with Volpe Brown, and Bob Boylan, a 13-year Bloomberg vet who previously oversaw Bloomberg's sellside fixed income OMS group. Technology editor Peter Chapman sat down with the two to discuss Bloomberg's strategy.
Traders: How does Bloomberg tier the market?
Boylan: Domestically, there are three tiers: the bulge bracket; the regionals and super-regionals; and the pure agency shops or boutiques. This last group is smaller and may or may not have banking and research. Certainly not a lot of retail.
Traders: And you are targeting tiers two and three?
Boylan: Yes. That's where we've really focused. The bulk of our business is split 50 percent Tier Two and 50 percent Tier Three. That's anything from the five to six man shop to a dozen traders or sales traders. It's a fairly even split.
Traders: How big is that market?
Boylan: Between the two tiers, that's about 250-300 potential customers. That includes maybe 20 to 25 regionals.
Traders: How big is bulge bracket?
Boylan: We count the top 15.
Traders: Why does your strategy exclude the upper tier?
Boylan: Two reasons. First, they are extremely sophisticated and expensive to support and implement. Second, we get paid for the Bloomberg OMS by putting the Bloomberg terminal on the desktop. But just about every trader, or 90 percent, at a Credit Suisse First Boston has Bloomberg on the desktop. So for us to get that other 10 percent…The extra we would have to provide would cut into our profit margin.
Traders: In general, don't the larger shops want ownership as well? Bloomberg delivers OMS functionality on a time-share basis.
Boylan: Absolutely. We've spoken to the majority of the bulge brackets and they all want access to the source code. But we're just not at the point where we are going to give it. And they understand that. Because Bloomberg has been pretty staunch on that. Bloomberg has changed the way it does business in the past five years. We've opened up considerably. But that is not necessarily on our radar right now. Until the bulge brackets are on our radar, opening up the source code is not on the table.
Traders: Historically, the cost of a Bloomberg has been prohibitive for smaller shops?
Boylan: The bulge bracket firms can afford it. And they see the value. But when you get to the middle. To the regional desks. To the Tier Three. A cost of $1,350 for what they look at as news, quotes, charts…
Ross: Is exorbitant.
Traders: So the smaller firms don't have too many Bloombergs?
Ross: Historically, no. So we said: if we build an order management system on top of the core Bloomberg…'
Boylan: You wrap in the market data… So, everything that Bloomberg does: news, quotes, charts, graphs, research, technical data. You wrap in an order management system that interacts with Nasdaq. A system that lets you manage your quote and also provides access to other pools of liquidity through providers such as ECNs… So, essentially on one desktop application you have the best market data and potentially graphics and great OMS and access to liquidity. We hope at $1,350 now this is a very compelling price point.
Traders: Cost is key?
Boylan: Since 2001 and the Internet bust and spreads tightening to pennies, firms all of a sudden weren't making money hand over fist. They have looked at how they can cut their technology costs. Historically they didn't mind paying a bigger sum for these other high-end, expensive providers.
Traders: O.K.
Ross: In this day and age, a firm would rather cut their technology costs than lay off traders. If they can do that and keep the desk as productive, we become a very attractive solution. So, we go to a lot of firms that are presently using Brass. Almost one-third if not more are ex-Brass customers. They want to be able to consolidate some of their costs.
Traders: O.K.
Boylan: So, what was unfortunate for our customers was very fortunate for our product. Because a lot of people who came to us originally were looking to save money. And that's how we got our foot in the door.
Traders: So, it's more cost effective to have one box that houses market data and order management than two separate ones?
Ross: Yes, that's the reality.
Traders: And your strategy is to chip away at Brass from the low end?
Ross: Brass has pretty much run the spectrum of the small shops and the large. royalblue came in from one side-the bulge bracket-with a high-end complete solution. That's their focus. They are an expensive product. We came in from the other side. We haven't really run into royalblue much. They can't get to the bottom tier because of their price points.
Traders: Can traders make markets in listed securities if they want?
Ross: Absolutely. We have complete ITS/CAES connectivity. We also have a non-member member DOT connection. We'll have a full-on BBSS connection by the second quarter.
Traders: You're just now adding BBSS? Most users have been Nasdaq traders up to now?
Ross: Yes, about 80 percent. Out of the gate, we could've built a listed product. We chose Nasdaq. Primarily because we thought Brass was vulnerable in the second and third tier shops.
Traders: When did you add DOT?
Ross: November.
Traders: Are you marketing your listed capabilities?
Boylan: We are waiting to campaign until the second quarter.
Ross: You can't sell a listed product without BBSS.
Traders: O.K.
Ross: Let's re-cap. We spent two years developing the system. We've been live since January 2002. We've implemented 30 firms over the course of the last 24 months. That's well over one firm a month.
Boylan: And the first six months-January to July 2002-the only customer we had live was Wedbush Morgan. So we really did all these firms in the last 18 months.
Traders: Most customers are replacing something?
Ross: Of my top 20 prospects, 18 are Brass customers. Three sales closing this month are all Brass customers. They are low-end Brass customers, of course. Not the bulge bracket.
Traders: Is this just a cost issue or are you better?
Ross: There is a cost issue and a huge customer service issue. Customer service has been the Achilles heel of Brass. And they still haven't… Sellside order management systems require a lot of handholding.
Boylan: And that's very expensive to do.
Traders: Bloomberg is known for its customer service.
Ross: There are some things we are obviously very good at. When we show up at a demo, our reputation speaks for itself. From a market data perspective, we're known to have awesome customer service. And we carry that through with all of our order management customers.
Traders: How many in customer service?
Ross: About 40 people globally.
Traders: What about functionality?
Ross: We think we're just as good, if not better than Brass in a lot of cases. Although it has taken two years to get there. We just came out with a
new product called "Bloomberg Total Access." It accesses non-SuperMontage eligible participants. And we don't charge for that.
Traders: "Non-SuperMontage eligible participants?"
Boylan: Arca, Instinet, Island.
Traders: Bloomberg Total Access is a front-end?
Ross: It provides access to ITS, ECNs and SuperMontage. It's all part of the same product. We don't sell it separately. Before you bought Brass and then paid for UMA. With ours, you can move your quote, access liquidity and trade as agent.
Boylan: But we are neutral. If a firm wants to use Lava or Sonic, they can.
Traders: You've had an NW2 replacement from the beginning?
Ross: Right
Traders: So when did you introduce Bloomberg Total Access?
Ross: November.
Traders: Does it include smart routing?
Boylan: We have basic tools. We have spread-watch. Remember this is our first release.
Ross: The front-ends that provide a lot of these sophisticated algorithms charge a hefty premium. We are trying to prioritize and build some algorithms. But, at the same time, we have to build out the rest of the product.
Traders: O.K.
Boylan: We're not looking to compete with Arca or Instinet with a complete suite of functionality. That's too expensive to do. We will provide basic functionality.
Ross: If a person wants to pay up for a Lava front-end, we'll take in the executions from Lava. The customer has already paid for Bloomberg.
Traders: It must be difficult to satisfy both retail and institutional shops. What are the major differences?
Ross: They're completely different. For retail, first and foremost, you've got to deal with the compliance implications.
Traders: Retail has a greater need here.
Ross: Sure. All the orders are "held." Then there's the limit order display issue. You have to make sure they get that order flow to a market maker that can execute it. If they don't… And execute it in a timely fashion. Retail is very much compliance based.
Traders: And on the institutional side?
Ross: There, everything is on a not-held basis and you're talking more about multi-capacity trading: agency, riskless principal and principal. The way you would like executions to flow into different books.
Traders: What have you done about multi-capacity allocations?
Ross: Out of the gate, we had a run-of-the-mill agency piece. But now we feel we have a pretty sophisticated agency model. So traders can choose which particular inventory they want a specific stock to go into. And allocate it that way.
Traders: Yet, it is still not as advanced as the technology of some of your competitors?
Boylan: In terms of doing some of the more sophisticated pro-rata allocations, we have a spec for it. We just haven't developed it yet.
Ross: The market has changed so much. A lot of people decided that strict agency was the way they wanted to go. Or strict riskless principal. Some people do a mixture of both. Our approach has been to sit back and look at where the market is going. And then allocate development resources accordingly.
Traders: A large firm trading on an agency, riskless principal, and principal basis needs advanced allocations capability.
Boylan: Absolutely. I've spoken to a handful of super-regionals with a substantial amount of institutional business. And, until we have a true agency sophisticated piece, we're not going to even go back and talk to them.
Ross: There are firms that are content with executing their order flow on a riskless principal and on an agency basis from a limited standpoint. And they know we are in the process of developing a much more sophisticated agency application in the next quarter.
Boylan: We do know a good number of institutional firms that are set on true agency with sophisticated allocations.
Ross: And we shy away from some of those firms.
Traders: What are your key initiatives for this year?
Ross: There are three. A much more sophisticated multi-capacity trading piece-a fee-based model rather than just agency. A full-on listed application, including the BBSS. And buyside connectivity.
Traders: What kind of sales growth are you expecting?
Boylan: We should add 20-25 new firms domestically this year. We're putting on three new ones in January – all Brass users.
Traders: Thanks, guys.