Broker neutrality is a phrase that providers of order management systems (OMSs) and execution management systems like to throw around to convey that customers are free to route orders to any broker or execution venue they choose. But the meaning of broker neutrality is starting to get blurry.
For more than a decade, buy-side institutions have been using order management systems, owned by independent technology companies that charge software licensing fees. But that appears to be changing. With several OMS vendors now charging the brokers transaction fees to receive institutional order flow, brokers may conclude that it's more economical to own the desktop.
In July, Investment Technology Group (ITG), an institutional agency broker that pioneered algorithmic trading in the early 1990s, agreed to buy Macgregor - the largest buy-side OMS player with 28 percent market share, according to TABB Group - for $230 million in cash. Macgregor brings more than 100 large institutional investor clients to the ITG fold.
Clearly, the crown jewel in this transaction is the Macgregor Order Management Network, which enables the firm's buy-side customers to route orders to more than 280 brokers, as well as alternative trading systems such as Liquidnet, Pipeline and Posit, ITG's own crossing network.
But what about the industry's concern for broker neutrality? Though ITG doesn't do proprietary trading, and it partners with its clients to analyze their pre- and post-trade transaction costs, ITG still is an agency broker and a technology vendor. It soon will own an OMS trading blotter, which acts as a central routing hub for equity order flow.
Raymond Killian, cofounder and CEO of ITG, asserts that ITG always has been a broker-neutral platform and that this deal will not change that. "We're not going to preclude any broker-dealer from using the network to link to clients," he tells AT. "That goes for Liquidnet or Pipeline or any one of the firms."
In fact, Killian points out that broker-dealers generate 15 percent to 20 percent of ITG's revenues. And, he adds, Macgregor operates under a similar business model. "I don't see any change in the way that we or they do business with the institutions," Killian says.
But, will other brokers that pay Macgregor fees to receive order flow from buy-side institutions perceive it that way? And how will buy-side customers benefit?
As buy-side traders take more control of their executions, they will want access to advanced execution management tools via the OMS. Those that can combine the OMS with such tools are in a position to attract more institutional order flow.
But given the advances in software integration - such as Web services, for example - couldn't ITG have integrated its execution management systems (i.e., Triton and Radical) into the Macgregor system without buying the company?
In general, brokers have been scrambling to get their newest algorithms integrated into the OMS trade blotter. Now, Macgregor and several other OMS vendors are charging brokers connectivity fees and message-based fees. One view is that it may be cheaper for the brokers to acquire the OMS vendors than to continue writing these checks, especially as electronic trading volumes continue to grow and spread to multiple asset classes. We've already seen brokers acquire aggregation platforms - Citigroup bought Lava Trading, BNY Brokerage bought Sonic Financial Technologies, and Goldman Sachs owns REDIplus and a stake in Eze Castle, another leading OMS.
ITG certainly is not the first broker to acquire a technology company, and it won't be the last. As buy-side traders funnel more of their order flow through electronic tools, we might as well brace ourselves for a wave of consolidation. Brokers will size up the OMS market and the execution management systems to determine which ones will be a winning combination.
Ivy Schmerken is a 20-year WS&T veteran. As Editor-at-Large, she covers trading for both Wall Street & Technology and Advanced Trading. [email protected]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