Much has been made of the sell side opening its wallet and snatching up trading platform vendors. According to Needham, Mass.-based TowerGroup, these acquisitions are an effort by brokers to own and control the trade lifecycle from platform through execution. New research from the consultancy identifies four key sell-side strategies that are driving brokers' acquisitions of execution management system (EMS) vendors:
1. The EMS platform facilitates access to the broker's algorithmic trading offerings and can be quickly configured to launch and support these products. Purchasing an EMS also offers a built-in client base with preconfigured and approved connectivity.
2. As brokers increase internal crossing capabilities and develop their own pools of dark liquidity, EMS platforms become an effective tool for aggregating disparate liquidity within a firm.
3. Many of the EMS platforms being targeted for acquisition offer nonequity trading capabilities, making them desirable to buy-side clients lacking an infrastructure sufficient for trading these instruments.
4. Acquiring an EMS platform immediately and significantly shrinks the market for competitors looking to white label a product. Further, the fear of having a competitor acquire a white-labeled platform that is currently in use is spurring plans for preemptive measures.
TowerGroup reports that the pace of acquisitions is a steady two deals per year. At this rate, the consulting firm expects that one of the four remaining independent EMS providers (FlexTrade, Portware, InfoReach and Trading Screen) will be acquired before 2007. <<<