Thomson To Market Fixed-Income TOM to the Buy-Side

The portfolio solutions group of Thomson Financial is looking to get into the buy-side, fixed-income trade order management (TOM) business with a running start. To accomplish that the group rejected initial talk of building its own product and elected instead to partner with Kestrel Technologies and its yet-to-be-marketed buy-side offering. Kestrel Technologies has been marketing a fixed-income trading system to the sell side, called RAPTr-NT, for some time but only about three years ago decided to get into the buy-side business. To make that entrance a smooth one, Kestrel approached Seix Investment Advisors, a New Jersey-based institutional fixed-income manager with more than $8.7 billion in assets under management, asking the firm if it would help Kestrel develop a system that could eventually address all the buy side's fixed-income trading needs.

President of Seix Investment Advisors John Talty says that Seix had been checking the market for a system to meet its needs but could not locate a perfect match. Most offerings, he says, were simply equities systems with a few fixed-income bells and whistles.

That does not surprise Mike Smith, executive vice president and principal with Cutter Associates, a consulting company specializing in systems and operations for investment managers. He says the market of fixed-income trading systems is an underserved one because converted equities systems just can't do the job. "There's a lot more analytics that come to bear on fixed income," says Smith, "the functions themselves are different."

Talty says that Seix also had other needs which vendors were not addressing. "We wanted a trade-order system that was kind of pre-clearance, that would not allow violations to occur at the point of trade and there was nothing out there that could handle the amount of guidelines that the actual accounts have and this allows an infinite number of combinations and drill downs of guidelines," he says. Now, he adds, there isn't a fixed income trade in his shop that doesn't go through the Kestrel product-it handles everything.

That's because over the past three years, Seix Investment Advisors, along with investment management firm Standish, Ayer & Wood, has helped shape the product that Thomson will shortly bring to the market. Thomson Financial Portfolio Solutions Group Director of Product Management Christy Bremner says sophisticated technologies and an open framework make partnering with Kestrel an easy decision.

She says the system is component based and uses the SIA/PSA Bond Analytics Module product produced by TIPS, Inc., a single high level routine which makes available much of the power of the industry standard SIA/PSA Standard Securities Calculation Software Library for calculating prices, yields, and other analytics on bonds, notes, and discount securities. The system is written in C++ with a UNIX back-end and uses BEA's TUXEDO product for messaging.

Additionally, it maintains a data center which allows clients to chose their market data and pricing sources from companies like Bloomberg and Reuters, accessing that information through a Triarch environment (Triarch stands for Trading Room Information ARCHitecture-a line of products aimed at the financial market place, designed to meet the needs of organizations that distribute, display, and manipulate a variety of real-time and non-real-time information).

Bremner says that, as part of the services it offers, Thomson can help with the integration of a client's portfolio management or accounting system into the still-unnamed TOM. Outgoing connections will initially consist of a linkage to TradeWeb, which provides liquidity in U.S. Treasuries, Agencies, Euro Sovereigns and TBA-MBS securities and boasts volume of up to $26 billion a day.

Although bond trading sites abound, causing fragmented and often isolated pools of liquidity, the fact that no Financial Information Exchange-type protocol (FIX) rules the fixed-income world means that, until a recent effort to develop one bears fruit, linking a TOM to all possible systems is financially and logistically prohibitive. It is also the most likely reason that Smith and other analysts find the fixed-income TOM market an underserved one.

To combat that, in conjunction with its entrance into the fixed-income TOM world, Thomson is working with Autex, an electronic database and online real-time network for trade order indications and executions for Listed, Nasdaq/OTC, ADR, Ordinary and Convertible securities, to make sure the TOMs Thomson sells actually have multiple liquidity pools to link up with. "The end game here is to have links from this system to whatever liquidity is sensible," says Bremner.

Autex, which has TradeRoute-a well established network for indications of interest (IOI) communications on the equities side-will soon have a similar offering for the fixed-income world, according to Jody Morse, senior vice president and director of global product strategy and operations with Thomson Financial portfolio solutions group.

"We are working to have our order management system seamlessly interface to that so that the actual IOIs will come directly into the blotter of our order management system and allow traders to act on those IOIs right in their workspace," she says.

Initially, Morse says, Thomson is targeting buy-side institutions managing at least a billion dollars in fixed-income securities using either spreadsheets or a network like Bloomberg-probably the most prevalent choice for fixed-income trading today.

In a study he recently did on fixed-income trading systems Principal Consultant with the Investment Management and Capital Markets Consulting (IMCAP) group at PricewaterhouseCoopers Blair Kanter found that while Bloomberg currently seems to be the system of choice, some failings may leave ample room for other market entrants.

Kanter's study found that the Bloomberg Portfolio Trading System is not as robust in pre-trade compliance functionality as other systems, something Seix's Talky says he has worked hard to ensure the Kestrel product won't be guilty of.

But Talty also admits that there are some areas the Kestrel product can improve as well, such as developing functionality to perform run scenarios, total return analyses and what-if scenarios-all of which are used to help determine the likelihood that an investment strategy will pay off. "Once they have that incorporated into it I think the system would beat any system or any combination of systems out there," he adds.

Morse says that while Thomson is working with Kestrel on some system enhancements, it has independently set up a cross-functional development team and partnered with Plural, an eBusiness consulting and development firm, to help beef up the system's decision support capabilities.

The ability to function as a true multicurrency system, says Bremner, is another major area of focus for Thomson. She says currently there are some multicurrency "holes" in the system which need to be filled before it can be successfully marketed to Thomson's existing client base. "We don't expect to have a client that would solely use it from a domestic perspective," she explains.

Additionally, Thomson is overseeing the porting of the Kestrel system from its current Oracle relational database to one made by Sybase-thus making it compatible with other existing Thomson products. "All of our clients are using Sybase or Microsoft sequel and we'll be largely looking to sell this to that client base," says Bremner.

The portfolio solutions group is looking for a late summer or early fall release of the system which will be priced on a per seat model, either as a perpetual license with maintenance or on a subscription basis. As far as ascertaining if the new offering is a good fit for your firm, Kanter says do some homework first. "First and foremost define your systems requirements and take stock of which fixed-income security types are most important to you," he adds, "because that may drive you in a different direction."

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The Straight Story

-Thomson will enhance and market Kestrel Technologies fixed-income trade order management system to the buy side.

-System looks to fill what Thomson feels is a gap in the marketplace.

Main selling point-designed for fixed income, not a converted equities system.

-Has been tweaked and streamlined at two buy-side institutions over past three years.

-System has an anticipated late summer/early fall release.

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Thomson System Technology:

-TIPS standard calculation software library

-C++

-UNIX back-end

-BEA's TUXEDO product for messaging.

-Triarch environment for accessing Bloomberg and Reuters

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Emerging Protocol

TradeWeb was recently named the winning bidder by The Bond Market Association (TBMA) in response to an RFP that it published in March looking for a vendor to develop a series of standard protocols to facilitate electronic bond trading. To make sure that the project stays on track, TBMA selected the management consulting firm Jordan and Jordan. See "A Fixed Income Protocol Takes Center Stage," p. 33