NYFIX’s sudden decision last year to stop selling order management systems to market makers highlights the difficulties vendors face in supporting this segment of the sellside market. The three vendors that remain acknowledge the challenges, but claim their multi-faceted strategies fit the times.
NYFIX, financially the weakest of the top firms, exited the business because it was facing a “contracting market” for its Fusion OMS, it said, and needed to focus resources on higher growth areas. Fusion was expected to contribute only about $3 million out of an estimated $120 million in revenues at NYFIX last year. The vendor’s exit leaves most of the market-maker business in the hands of Fidessa, SunGard and Citi’s Lava Trading division.
Lava saw its profile rise with NYFIX’s departure. The electronic trading division of the big bank is taking over NYFIX’s 16 accounts, which will discard Fusion and install the Lava ColorPalette order management system. That brings the total number of firms using ColorPalette to about 50.
SunGard boasts about 70 market makers on its Brass system, or about half the total number of Brass customers. The U.K.-headquartered Fidessa says about 60 percent of its 60 North American sellside OMS customers are market makers.
The Players
The true measure of an OMS vendor’s market presence, though, is the number of people using its system. Based on that, the business is dominated by SunGard and Fidessa, which have installations at the largest firms.
Before the NYFIX deal, ColorPalette was used by 1,000 traders at 35 firms. Neither Citi nor NYFIX execs could say how many Fusion users there were, but estimated that the 16 trading desks averaged between six and 50 traders. Fidessa says it has 4,000 end users in the U.S.; SunGard won’t say.
NYFIX, which will cease supporting Fusion, steered its customers to the Lava system because of the similarities between the two systems, says Chris Walsh, head of NYFIX’s OMS division. NYFIX customers were also in favor of the move, he adds.
As for price, Keith Jamaitis, Citi’s director of ColorPalette product management, says new Fusion users should not experience any sticker shock. They might even get “incentives to upgrade sooner than later,” he notes.
As part of the deal, Citi agreed to build into ColorPalette access to certain NYFIX services the Fusion users previously got. Those include NYFIX Marketplace, its connectivity service; the firm’s NEXAS algorithms; and its alternative trading system NYFIX Millennium. That arrangement is renewable periodically, Jamaitis says.
NYFIX entered the market-maker segment of the sellside order management system business in 2002 when it invested in a company called Renaissance Trading Technologies. The system it got, a Nasdaq market-making OMS then known as Platinum, was meant to complement NYFIX’s strengths in NYSE-listed order management.
Business went well at first as the newcomer grabbed customers from Brass, sources say, but hit a wall when customers began asking for full depth-of-book access to markets. Previously, the NYFIX had been offering just top-of-book access.
Building an infrastructure to support full depth-of-book access is expensive, as all the different marketplaces must be reachable. NYFIX did not want to devote the resources for such an endeavor, sources close to the firm say.
What Price Increase?
The costs loom especially large when revenues are considered. The price of a sellside OMS terminal hasn’t budged in the past 12 or 15 years, remaining at about $1,000 per terminal. Vendors say the terminal business is very low-margin, while the money is made in ancillary services.
Five years later the dream is dead. NYFIX is focusing on its network and Millennium ATS. The firm isn’t exiting the order management system game entirely. It will continue to market and support its well-established FIXTrader OMS, originally built for NYSE traders, marketing to broker-dealers trading on an agency basis worldwide (see accompanying article).
The more vibrant agency-trading end of the OMS business has a slew of competitors, large and small, including the three heavies in market-maker systems. The systems are generally less complex than dealer systems. Their main function is to accommodate inbound order flow from customers and outbound flow to trading venues.
NYFIX’s bad luck with Fusion reflects a number of factors, sources say, including zero growth in the number of market-making firms in recent years; the commoditization of the product; thin margins; and nonstop demands from existing users. At the same time, during the five years Fusion was on the market, Fidessa achieved significant success.
Dealer Reality
All told, there are about 150 market-making firms in the U.S. of any significance, according to data from Nasdaq, roughly the same number there were three years ago.
Established market-making shops have dropped out. New ones have ramped up. But the total has stayed about the same. Volume is consolidating into fewer and larger hands. The trend reflects the difficulties of making money as a dealer in an era of narrow spreads and buyside self-reliance.
To cope, market-making firms are trying to do more with less. That requires help from their OMS vendors. A major request, say vendors, is for more automation of market-making chores. “It allows them to be more active in more names without increasing head count,” says Ralston Roberts, a senior vice president of product management at SunGard who is responsible for Brass. “That then allows them to solicit more business from their buyside customers and take advantage of any trading opportunities to generate profits for their own books.”
Roberts’ observations are borne out by data from Nasdaq. More than 30 of the top 150 market-making firms had positions in at least 1,000 Nasdaq and non-Nasdaq stocks on a recent day in December.
Other sources contend that a vendor’s ability to support market-maker demands is made easier when the customer base is large. Such economies of scale help spread out the costs of writing new code.
Staying the Course
Sellside order management systems have been around for about 15 years now, and most are pretty similar, vendors admit. With the product largely a commodity, pricing has become more competitive and margins have narrowed. Firms hoping to stay the course have by necessity made the OMS one part of a broader broker-dealer strategy, rather than the entire strategy.
At Citi, for instance, ColorPalette is viewed as a distribution platform for the bank’s sellside execution services. The bank has invested more than $1 billion in the past three years in a portfolio of electronic trading businesses in a bid to cater to broker-dealer needs. Its acquisitions of ATD, the OnTrade ECN and Lava Trading are chief among them.
Jamaitis notes that a key differentiating factor between Citi’s OMS offering and the rest is its ColorBook direct-market-access product, smart order types and smart order routing.
Citi has made inroads with ColorPalette primarily at smaller firms, but does count Piper Jaffray and Sanford C. Bernstein as customers. With the NYFIX acquisition, Citi wins Baltimore’s Stifel Financial as well.
Like Citi, Fidessa too likes to talk about its initiatives in non-core technologies such as basket trading, market access and other asset classes.
“Our customers want to do more with their trading systems,” says Martin Hakker, an executive vice president for marketing at Fidessa, “which means bringing out new functionality and incorporating that into their existing work flow.”
The vendor began offering algorithm trading about a year ago with a homegrown technology known as BlueBox. It has been working toward increasing the sophistication of its strategies, going beyond such benchmark strategies as volume-weighted and time-weighted average price. One new execution strategy will let users sweep some of the various dark pools simultaneously as they seek out liquidity. Fidessa has also made it possible for its customers to offer BlueBox algos to their customers.
For its part, SunGard has also taken steps to make the OMS just one part of a broader marketing effort. Last spring, SunGard split its $2 billion financial services group into two divisions along industry sector lines. Brass and other trading-related products such as compliance technology and routing were grouped together. “We are supporting the entire trading life cycle,” says Alan Mangelsdorf, a marketing vice president.
Like Fidessa, SunGard is also working to improve Brass users’ access to markets. Smart order routing is a topic of interest at SunGard’s quarterly roundtables, Roberts notes, as is sponsored access. Under that initiative, SunGard lets Brass users access the various market centers via its own broker-dealer, known as Assent. That benefits those firms lacking membership in a certain exchanges.
“If your primary focus is OMS business, then it is a hard business,” Roberts says. “We have changed the way we look at the world. The focus is much larger. The OMS is one component.”
NYFIX Still in the OMS Game
NYFIX may have exited the market-making end of the order management systems business, but it is sticking it out in the agency-only end.
There are 116 firms using its FIXTrader OMS worldwide, including 100 in the U.S. They average between seven and eight users.
NYFIX plans “a significant performance release” for the product to increase its throughput this month, according to Chris Walsh, head of NYFIX’s OMS division, and also expects an uptick in users in Europe.
The system has traditionally been used by New York Stock Exchange floor traders, but the restructuring of the Big Board into a hybrid electronic marketplace has reduced their numbers.
Consequently, NYFIX’s OMS division, historically the smallest of the public company’s three divisions, has gotten even smaller. The group took in $8.3 million in the first nine months of last year, down from $14.5 million in the same period of 2006. It booked losses during both those time frames.
NYFIX may have exited the market-making end of the order management systems business, but it is sticking it out in the agency-only end. There are 116 firms using its FIXTrader OMS worldwide, including 100 in the U.S. They average between seven and eight users.
NYFIX plans “a significant performance release” for the product to increase its throughput this month, according to Chris Walsh, head of NYFIX’s OMS division, and also expects an uptick in users in Europe. The system has traditionally been used by New York Stock Exchange floor traders, but the restructuring of the Big Board into a hybrid electronic marketplace has reduced their numbers.
Consequently, NYFIX’s OMS division, historically the smallest of the public company’s three divisions, has gotten even smaller. The group took in $8.3 million in the first nine months of last year, down from $14.5 million in the same period of 2006. It booked losses during both those time frames.
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