Why aren't multibroker execution platforms more widely adopted? Brokers continue to invest millions in closed platforms, but customers seem to overwhelmingly want open ones. As Seinfeld would say, "What's with that?"
To answer that question you only need to look at the acquisition tombstones -- REDI was bought by Goldman Sachs, Lava Trading by Citigroup, Sonic by BNY ConvergEX, Instiquote by Bank of America, NeoVest by JPMorgan, RealTick by Lehman Brothers and so on. Brokers bought up the prime DMA real estate in a gold rush to lock hedge funds into their prime brokerage relationships. And it worked.
Today, buy-side traders use proprietary platforms to pay for services. But this means having five or more platforms on their desks, which has become overwhelming for buy-side traders, their support staff and technology groups.
But as low-touch institutional trading has grown to more than 50 percent of flow; commissions continue to compress; buy-side traders increasingly ask for multibroker functionality; bulge-bracket brokers remain resistant to interconnect and cut each other checks; and the cost of innovation, market data and infrastructure maintenance only escalates, the question on everybody's (or at least my) mind is, "Are we nuts?"
Brokers all are investing millions in distribution platforms at the same time that clients are trying to get these platforms off their desks. But if the brokers' closed platforms open up, will that allow their clients to escape and route flow through their platforms to their competitors? Is there a way out of this standoff?
In an ideal world, the platform would be just that -- a platform. An agnostic container with prebuilt widgets allowing buy-side traders to stage orders, manage market data, estimate cost, examine risk, provide broker-agnostic DMA, execute both broker-sponsored or bespoke algorithms, alert traders of unexpected occurrences, and interact with dark pools -- while seamlessly interfacing with the firm's OMS and back-office systems.
Fortunately, we are starting to see the multibroker platform pushing forward on three fronts.
First, large market data providers are beginning to move into the void. Bloomberg, Reuters and Thomson are beginning to develop products in this space. While these initiatives are in early stages, the vendors may pull it off, as they already are trusted entities on most desks, and already facilitate financial messaging and order delivery.
The second push is from the OMS providers, which are beginning to tightly integrate execution management into their order management systems. Charles River has been working on a converged OMS/EMS for a number of months. And within the last few weeks ConvergEx and ITG both announced their intentions to provide tightly integrated EMS/OMS functionality on a single platform. ConvergEx and Eze Castle have developed an integrated EMS/OMS based upon a newly developed technology architecture. ITG announced that it will be sunsetting Macgregor and adding OMS functionality to its highly respected Triton platform. Both of these new platforms, while owned by brokers, will be broker-agnostic and allow multibroker DMA, algorithms and dark pool access as well as analytics.
The third strategy for providing a multibroker platform is a bit more of a stretch but may have the greatest chance of success. This is a broker-disarmament strategy. The dealers form a consortium (either from scratch or by buying equity in an existing platform) to build the requisite functional and fair platform, giving up their proprietary initiatives and focusing on developing what investors really want -- better execution quality, less market impact, more-robust algorithms, a wider array of risk tools, access to other asset classes, foreign market linkages and better analytics.
While it may be nice to own the platform (in fact, it still may be mandatory today), at the end of the day, customers want a single platform to access quality brokerage services from all their brokers, not a dozen look-alike platforms used primarily as remote commission depositories.Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio