Market Data Vendors Moving into STP Sphere

With the dreaded T+1 deadline fast approaching, market data vendors are scrambling to forge alliances with STP specialists such as order management experts,so that they can sell more profitable value-added applications.

As Wall Street firms gear up for the implementation of one-day settlement (T+1) and seek greater trading efficiencies, acquiring straight-through processing solutions are high on most financial institutions' agenda. However, rather than turning to some high-flying dot.com upstart to answer STP questions, Wall Street firms may soon find themselves relying more on advice from an old standby, their market data vendor (MDV).

That's because, some industry observers say, MDVs are positioning themselves to capitalize on their ownership of the broker's desktop. Whether it's Reuters, Bloomberg, Bridge or Thomson Financial, firms traditionally considered MDVs, are actively building their electronic operations-such as order management, trade routing or electronic clearance-and through consolidations or alliances, adding pieces of the STP jigsaw puzzle to their arsenal.

"With the amount of desk real estate that firms like Reuters engulf around the world, we are in a position to support the needs of the sell side and the buy side," when it comes to STP, says Geoffrey Sanderson, managing director for Reuters' securities transaction services in London. Add to that the fact MDVs face a saturated and slow-growing market, the shift to application service provider from number pusher is a natural extension and one that appears well on its way. Behind the scenes, MDVs are busy striking deals, looking for alliances and eyeing their own computing solutions for the processing nightmare that plagues much of the brokerage community.

"I don't think there are a lot of data vendors out there right now who have true straight-through processing solutions," says Marilyn Hignett, an analyst with The Capital Markets Company in New York. However, she's quick to add, "everybody is working full force towards this," so it's only a matter of time.

Shift to Value-Added Services
Dushyant Shahrawat, an analyst with the TowerGroup in Needham, Mass., has also noticed the heightened interest among MDVs in applications. He says that the "migration of data vendors from purely data-side to value-added application services" has been underway for the past year and a half. That's because the value in the market has obviously shifted away from pure data. Nobody is really paying for data anymore-they're not paying top dollar. What clients are really paying for are applications of value-added services-consulting, integration services, strategic advice-but it's not obviously data. Therefore, (MDVs) are getting into the applications business." He adds, "It will be a while before they are strong enough on the application front to really give the entrenched application providers a run for their money."

Leveraging MDV Advice
Mark Minister, CEO of Bridge Trading, says the "theory" that financial institutions should leverage their MDVs for STP solutions is "absolutely sound. The execution of the theory is somewhat more challenging. We're doing pieces of it and it's a logical leveraging of our infrastructure and our client base."

Minister says that "traditionally market data vendors have looked at their market as one directional-I send you information and you looked at it." But that is changing. "Now, they're two way and the bandwidth that goes to you is the same that comes from you," which combined with interconnectivity among market players makes the feed valuable for sending more than static information about equity pricing. "When you consider the things that our clients may want to exchange it could be pre-trade information, trade information or post-trade information. All of a sudden that starts sounding a little bit like the makings of straight-through processing."

Lou Eccleston, director of global transaction and data services with Bloomberg, says, "We don't consider ourselves a data vendor." In fact, he says, his firm has been "focused" on straight-through processing "for a couple of years now from a very different angle." STP, he says, is merely the automation of the securities process, which Bloomberg has been involved in for the past 15 years. "Electronic trading, we had it 15 years ago before anybody talked about it." The same, he says, about centralized processing and hosting of applications. "Today's buzzwords have been part of our value proposition for a long time and central to our strategy."

In their quest to leverage their desktops connections to financial institutions, the question remains: Do data vendors (or for that matter anyone else) have the moxie to develop a silver bullet, a one-stop STP solution for Wall Street's firms? Deborah Williams, an analyst with Meridien Research doesn't think so. "None of the data vendors have a total STP solution. They have pieces, components." It's not like you can turn to your data vendor for a solution that runs the gamut from trader execution to processing, clearing settlement and accounting, she says.

No Silver Bullet
That's because STP is not a market. There is no STP solution. It's a methodology that encourages automation. What you are trying to do is get information from the front office through to clearing and settlement seamlessly without intervention and that automatically means dealing with different parties who run different platforms. "There's never going to be a vendor in my opinion that is the STP vendor. Nobody has a silver bullet," Williams emphasizes.

Obstacles Facing MDVs
One obstacle working against data vendors, Williams says, is that "the leading institutions are always going to be motivated to buy the best of breed solutions. There's always a danger when you are looking at more than one solution from a single provider," she cautions, adding: "There's a lot of pressure to innovate and I think that naturally leads to best-of-breed technology." It's that mindset that has led to "hodgepodge" of systems that run financial institutions and that will continue, she says. "That's just the state of the industry. That's not going to go away."

So the door is open to data vendors who can master the best-of-breed task, but that in itself is a challenge, says Shahrawat. "Data vendors don't have the kind of expertise on the application side no matter what they say." However, he adds, they do have the resources to develop it.

Best-of-Breed Battles
Williams says that data and information is the MDVs strength and they will likely look for ways to bundle that with existing solution providers to create best of breed solutions. We're already seeing evidence of that, as data vendors ally with outsiders whose expertise complements their existing offerings.

Bloomberg, for example, has joined with business consulting giant Andersen Consulting in creating a solution to deliver STP services globally to the investment/asset management community. The solution, which will be called Andersen Consulting Web eSTP, will be an Internet portal that will provide industry participants with a single point of entry for pre-trade and post-trade activities. It's designed to reduce the costs and risks associated with trading securities.

Andersen has turned to STC, a middleware provider of electronic business integration services, to help build it, while Bloomberg has signed a memorandum of understanding that could see it provide market information, analysis news and trade/order management. Eccleston says, "Integration is the greatest hidden cost in STP. You can go buy all the pieces of the puzzle, but you got to get them to talk to each other" at a "reasonable cost," which eSTP will allow them to do. Bloomberg's strategy is to act as an integrated desktop front-end that serves as an STP hub, connecting to clients' internal and external applications, including Bloomberg-developed products for trade management, execution and order routing.

Other examples of alliances and co-opetition abound. Take the Thomson group of companies. In addition to expanding its data stable with an announcement that it will buy Primark Corp., while Thomson ESG has entered into a deal with rival Depository Trust & Clearing Corporation, to create a global trade processing venture. The long-range goal is to create a single trade management platform over a secure IP network, building on the trade processing businesses of DTCC and Thomson ESG, including its OASYS trade allocation system.

Bridge recently formed a joint venture with Orc Software AB, to develop online trading services to the global derivatives and equities market. The deal with Orc will allow the venture to leverage both Bridge's market data and some of its execution technology. Minister says that while his firm is streamlining the execution parts of STP "we have not attacked to any degree the back office. There are some folks who fully understand that, but don't have full connectivity. I think there are some interesting partnerships that could develop involving the major market data vendors." Other STP offerings that it touts are Electronic Order Module (EOM), an electronic order processing system that includes program trade reporting tools, transaction summaries and provides widespread connectivity to exchanges, electronic marketplaces and back-office systems. It also provides Institutional Order Entry (IOE), an order routing system that links buy-side institutions to Bridge Transactions Services' broker neutral network, and GlobalFN, which allows firms to send FIX messages and transaction reports anywhere in the world.

As for Reuters, Sanderson says "it's fair to say we would be looking to add more functionality which could help our clients in their STP aspirations. "There aren't many good examples of people really making STP happen in a big way. What we're finding is you need to work with clients in a lot of different ways. They're all moving at different paces." The key, he says, is electronically capturing the trade information at the front end of the process. He cites its product InterTrade Direct as the primary example of Reuters STP offerings. It's a global, cross-border electronic trading service featuring a modular suite of services that facilitates STP. It provides electronic order processing and trade management and is platform independent.

One small data vendor that understands the value of aligning with best of breed players is Canada's Star Data Systems Inc., which claims 70% penetration into Canada's broker community. Based in Toronto, it also provides real-time transaction processing services. It recently struck a deal with Belzberg Financial Markets & News International Inc. to license Belzberg's order management and routing systems as part of a plan to offer straight-through processing solutions as part of an e-settlement system it's developing. Users will gain direct access to NYSE and Nasdaq market makers, Instinet, Redibook, the Toronto Stock Exchange and the new Canadian venture exchange. Shortly after, it entered a CAN$7.5-million licensing agreement with Fidelity Investments Canada Ltd. for its e-settlement system in an administration service that Fidelity is building with Cap Gemini Ernst & Young for investment intermediaries. Gerry Rivers, Star Data's executive vice president of wealth management solutions, says "it's the advantage of the data vendor relationship that puts us in a unique position to complement our back office and record keeping services."

External Competition
Data vendors could find that technology companies pose a threat to their expansion plans. For example, Financial Models Company Inc. created its own data vendor, Securities Valuation Company in the early 1990s to complement its offerings. Raymond Oh, vice president of product management at FMC, says in looking at the whole straight-through process, the company decided the securities data was a "critical function" to providing a one-stop service, which his firm says it's close to providing through its products, such as FMC Net. Clients, he says, are looking for "an integrated STP solution" and that's what FMC is striving to deliver.

Ger Rosenkemp, president of Asset Control, a European data management company that is looking to break into the U.S. market, says data vendors are also at risk because "no data vendor has all the data." Asset Control, which currently provides data management solutions to large banks like ING and ABN Amro, streams, consolidates and cleanses data for financial institutions through Asset's electronic platform. "Banks want to be in control of their own data. They don't want to be dependent on just data from Reuters, Bloomberg, Telekurs or Bridge," he says. That opens the doors to firms that can consolidate data feeds and provide value-added electronic feeds to enhance STP.

Other Stumbling Blocks
Other obstacles facing data vendors include reluctance by some Wall Street firms to outsource. Williams says "not all institutions will be happy relying on somebody else" to handle execution and processing services. What's more, becoming an applications service provider requires a change in the way MDVs traditionally do business. Bridge's Minister says data vendors aren't used to going into a client's operation on six to 12-month customization projects. Moreover, MDVs are usually large organizations with separate divisions and cross selling across such organizations can prove challenging. "I don't think there's anyone out there doing it effectively," says Hignett.

Shahrawat adds that MDVs have to fight the perception that they're simply information providers. "It will take them some time to reposition themselves as application service providers." Williams points out that STP is as much about re-engineering internal business processes for processing trades as it is about technology and that sphere traditionally belongs to the Andersens and KPMGs of the world, rather than MDVs.

As to who has the inroad on STP, Williams says "Thomson is clearly making more of an attempt to bring the solutions together." Shahrawat, however, says only time will tell. He notes that it's the "second tier" financial institutions that are waking up to the need for STP solutions. Minister says that if the regulators legislate one-day settlement everything could fall into place. "Often times you'll find how to do something by being forced to do it."