It's the most expensive buyside blotter on the Street – and traders are snapping it up.
LatentZero, the new kid in buyside order management, is trumping many of its more established competitors with technology typically found on the sellside. Its Minerva trading and order management system can cost several million dollars, but it is edging aside older software.
"We are seeing a transition away from companies with an existing client base that have not moved on from a product perspective," said Dan Watkins, LatentZero's co-founder. "We are one of only two companies moving on from a functional perspective."
The other one is Charles River Development, according to Watkins, but Linedata Services is not far behind. Longtime market leader Macgregor doesn't rate a mention.
In fact, in two very large Minerva deals recently, Macgregor's technology was given the heave-ho. State Street Asset Management replaced Macgregor's system with Minerva in February. An unidentified New York money manager did the same last month.
Rebuilding
"Macgregor appears to be in a rebuilding phase," noted TowerGroup analyst Gavin Little-Gill. "They've fallen off the radar." Little-Gill confirms the top players are now LatentZero, Linedata and Charles River.
LatentZero, a British firm, launched Minerva just two years ago. Today it claims about 13 clients. That compares with approximately 90 using Macgregor systems and 70 apiece for Charles River and Linedata. These firms are between ten and 15-years old.
LatentZero got its foot in the proverbial door selling a compliance engine called Sentinel in 1999. At that time there was no sophisticated compliance technology for the buyside. Nasdaq market makers had their orders vetted in systems from SunGard and royalblue, but the buyside was still using pen and paper.
Compliance engines analyze orders to make sure they do not breach client and regulatory requirements. They are used chiefly by portfolio managers in the practice of risk management.
Goldman Sachs Asset Management was the first Sentinel customer. Now about 34 are using the technology. With the money it earned selling compliance, LatentZero developed Minerva.
The original plan, according to Watkins, was always to roll out an order management system for the buyside. Watkins and co-founder Richard Jones were IT execs working in Asia for the brokerage house Jardine Fleming. That's when they thrashed out the LatentZero business plan. Watkins oversaw technology for both Jardine's sellside and buyside divisions in Tokyo. Jones was in charge of buyside technology in Hong Kong.
Watkins' unique perspective came in handy when it was time to implement an order management system for Jardine Fleming Asset Management. There was nothing suitable for purchase so they adapted the system used by the brokerage division.
That experience informed the design of Minerva. The system layers a real-time' messaging architecture on top of the central database. So, data does not have to go through the database to get to where it is going. That's how it works on the sellside. On the buyside, data typically travels through a database. "I'd long thought the buyside was underserved from a technology perspective," said Watkins.
Traditionally, on the buyside, an order is entered into the system's database by a portfolio manager and extracted on the other end by the trader. The process can be slow. Not with Minerva. "There is no database transaction involved in the trade," explains Watkins. "It's all in real-time and asynchronously persistent into a database."
The process makes for speedier inflows and outflows of data with no waiting. In other words, zero latency.
That speed comes at a price though. Only the richest on the buyside can afford it. "The architecture deployed by Charles River and Linedata is the architecture that exists in 80 percent to 90 percent of the firms managing $25 billion to $125 billion in assets," explained TowerGroup's Gavin-Little. "LatentZero is what you see at sellside shops and a very small segment of top hedge funds and sophisticated asset managers."
The analyst further notes that what it boasts in architecture it lacks in functionality. "The product does not have the same functional richness as that of a Charles River, Linedata or Macgregor," he says.
Architecture
LatentZero's fancy architecture speeds up inflows and outflows of external data as well. The system, for instance, can take in market data from Bloomberg and Reuters that interacts with orders sitting in the blotter. The trader can write a program that compares a limit price sitting in the blotter, for example, to the last bid.
"It shows me how I'm moving versus the market," says Watkins. "That's the real business benefit of the technology. This is the kind of architecture the sellside uses."
More effective management of indications of interest (IOI) is another benefit conferred by the real-time messaging architecture, according to Watkins. Indications, or IOIs, are essentially market data sent by brokers. They include price and volume information at which the broker is willing to trade.
IOIs are often problematic for buyside traders and their order management systems. Sellside traders will often inundate buyside desks with hundreds of messages, many of little value. Order management systems can start to slow down under the weight of all the IOIs. That is often during the busiest trading periods such as the open and close. Many of the messages are duplicates sent by the same broker who assumes the buyside trader only looks at the latest indications.
LatentZero has incorporated watch list' functionality into Minerva. Traders create a watch list of, say, 200 names. They only see IOIs for those 200 stocks. The rest pass into a separate database. "The IOIs are received as an event in memory," notes Watkins. "Anything not on the list is persisted into a database."
Mouse Click
Besides unclogging the system, this process offers two other benefits. First, the trader only sees a predefined list of messages. He doesn't see what he doesn't want to see. He can also write rules to delete duplicate messages. Second, he can convert the IOIs into orders with a mouse click.
"It's actionable data," said Gail Romano, head of marketing at LatentZero and a recent recruit from the New York Stock Exchange. "In the past, it was just reference data sitting in its own silo available for viewing only." Most indications of interest arrive on the buyside trader's desk via Thomson Financial's AutEx service.
And, more and more, buyside traders need actionable data. The level of professionalism on the buyside continues to grow as money managers put more emphasis on containing their trading costs. "It's all about value now," Watkins says. "Best execution."