VMUs Watch Out!

In the latest challenge to VMUs, TradeWeb is teaming with OMS vendors to expand STP in fixed income.

Is it beginning to seem as if the combination of e-trading platforms, order-management systems and real-time messaging could fill the breach left by the disappearance of the Global Straight Through Processing Association?

Capitalizing on the death of GSTPA - and rival Omgeo's equity-market focus - TradeWeb, a leader in online-bond trading, is stepping into the post-trade arena of electronic allocations, confirmations and settlement instructions.

"It's not clear to me that the Omgeo (and) GSTPA initiatives are taking into account fixed income," comments John Duarte, senior vice president of Mellon Bond Associates, who adds: "We're looking for solutions."

About seven months ago, TradeWeb launched TradeXpress, a paperless trade-confirmation and account-allocation network that has been used by approximately 250 buy -side customers and nine dealers.

"TradeXpress intends to become the STP platform for the bond market," says James Toffey, chief executive officer of TradeWeb.

Two years in development, TradeXpress required a separate communications server to connect the e-trading system with order-management systems. As of Jan. 21, 2003, more than 200,000 trades, valued at over $1 trillion, had been electronically allocated and confirmed by users of TradeXpress.

In January, Charles River Development, a major supplier of OMSs, announced that it was writing an interface to the TradeXpress application-programming interface. Charles River Development is the first OMS to build an interface to TradeWeb using the FIX protocol.

According to a recent report by Financial Insight Analyst Damon Kovelsky, "The demise of the GSTPA has presented an opportunity for TOMS (trade-order-management systems) to enter into this space as bilateral providers of electronic confirmations."

In 2003, the analyst predicts that OMSs will continue to fine-tune functionality that will enhance automation of the trade cycle, including "allocation engines that support VMUs and/or a strategy if VMUs fail, as well as fixed-income capabilities, especially a plan to use FIX 4.4 (the next version of the protocol which supports fixed income)."

At Putnam Investments, Managing Director William Sullivan says that an order-management platform is the beginning of any straight-through-processing solution.

"If you can construct a trade in your order-management platform and you can allocate it, and you can route it to an e-trading platform, and you can execute the trade and not have to re-key data anywhere along that line, that's a good efficiency saver for us," says Sullivan, whose firm is a customer of the Charles River OMS and is an extensive user of TradeWeb.

In a certain way, it makes perfect sense. TradeWeb is evolving into a centralized-electronic exchange for the bond market, covering eight products, ranging from treasuries and agencies to commercial paper and Euro Suprnationals, with access to 19 fixed-income dealers and 1,200 fixed-income buy-side institutions.

"In the bond market, where we link the institutional investor with their dealers, we do believe we have enough critical mass to provide these STP services as a value-added proposition to the industry," says Toffey.

Moreover, it's leveraging its position to offer STP services to the fixed-income markets at a time when Omgeo is ignoring fixed income, according to several sources. "TradeWeb is really smart. It's saying, 'Why don't we steal the market for STP away from Omgeo,'" says a buy-side source. "And Omgeo is in no position to fight back because Omgeo has its hands full with equities," the source adds.

Rather than wait for VMUs to address fixed income, buy-side institutions that trade extensively through TradeWeb are already using the TradeXpress functionality to confirm and allocate block trades to sub-accounts.

Fischer Francis Trees & Watts - a fixed-income manager that uses TradeWeb extensively - also uses TradeXpress, even though it manually enters the allocations today but plans to use the OMS/API in the future. "Once we put the allocation in, it feeds our back office so we don't have to re-key the trade and it goes out to the dealer so they don't have to re-key the allocation. So it's a huge step forward," says Mike Wyne, director of global operations with Fischer Francis Trees & Watts, who adds, "It's two different pieces for the price of one."

Cost is definitely a factor in luring the buy side to participate. TradeWeb is giving "free" TradeXpress software to the middle- and back-office staffers to empower them to allocate and confirm and see all the messages, says Toffey.

T.Rowe Price, which recently converted to CRD's OMS, is interested in the interface. "Our initial interest was so that we wouldn't have to double enter the trades any longer between Charles River and then go into TradeWeb," says Bill Stokes, senior business systems analyst.

While T.Rowe "is still doing confirmations manually over the phone with brokers, we are looking at ways to incorporate STP in an electronic fashion," says John Sadowski, manager of fixed-income operations. But Stokes, who has not yet had a chance to examine the STP functionality, has questions: "Would we be able to confirm a trade over TradeXpress if we didn't trade with TradeWeb? If the brokers were not on the network, would they add them?"

"This is one of the things we look to accommodate in the future," responds Toffey. As part of his vision of offering "a comprehensive solution to all participants," namely the buy side, sell side and custodians, Toffey plans on supporting phone trades that occur outside of the e-trading platform. He's also looking into the idea of providing "separate STP services to other market participants."

Moving beyond confirmations and allocations, TradeWeb is working on building a standing-settlements-instruction database called AccountNet - slated for launch in February - that will cover equities, foreign exchange and all fixed-income securities.

"In order to support the bond market you need to have settlement instructions for every type of instrument, globally," says Toffey, who admits TradeWeb is gearing up to compete head-to-head against Omgeo's Alert database, as well as Omgeo's Oasys and Oasys Global products - currently the standard for allocations. Discussions are being held with custodians and TradeWeb claims they're interested in both TradeXpress and AccountNet.

Buy-side firms seem receptive to TradeWeb expanding downstream into the settlement space. Speaking at the Bond Market Association's technology conference in November, Wyne says "I want to get out of passing on Mellon's instructions to the dealer," referring to the custodian bank. "I don't know if it's better for the e-trading system to do that or a VMU," he adds.

Fritz McCormick, an analyst covering electronic trading at Celent Communications agrees, "It's a great idea that they're providing straight-through processing," but he questions whether the buy side has the capability in its back office to handle electronic fixed-income allocations, fills and settlement instructions. "It's a great idea in principle, but in practice they might find that it will not be as easy as plugging in."

That's not a problem, according to Wyne, whose firm has had an electronic connection to TradeWeb since 2001. "For two years, every time we do a trade on TradeWeb it gets written to a file which gets loaded onto our accounting system and so we have STP from TradeWeb now," he explains. Though this is a low-tech method, he plans to use the API with messaging in the future.

Given this capability, some buy-side firms that use TradeXpress are questioning the validity of the VMU model. "Why would I need a VMU if I do a trade with TradeWeb and give them the allocations and have it go straight through to the (custodian) bank and to the dealer?" asks the buy-side source. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio