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Automated-Allocation Tool Targets Smaller Investment Managers

Some large broker/dealers, tired of receiving faxes from lower-tier investment managers, have worked with Omgeo to develop a Web-based allocation solution.

In an effort to garner revenue from smaller investment managers, Omgeo, a provider of post-trade, pre-settlement services, will offer Omgeo Allocation Manager (OAM) -- a new Internet-based application which automates the communication between the buy and sell side.

OAM, developed jointly with Massachusetts-based Radius Partners, will be offered to investment managers free of charge and will, initially, connect them to four major broker/dealers: JPMorgan, UBS Warburg, Morgan Stanley and Credit Suisse First Boston. Peter Tierney, deputy managing director for the American with Omgeo, says that it is critical Omgeo expands the number of brokers on the system so investment managers can interact with many counter parties.

"It's important that we bring on brokers five through 30 as quickly as possible," says Tierney.

The trade flow involving the new tool might go something like this: Small to mid-sized investment managers will most likely still use the telephone to call their broker and verbally communicate the initial block order. The broker/dealer would input the trade into their order-management system where the trade would be routed to an execution destination. Once executed, the information would flow out of the brokers order-management system and into Omgeo's new OAM, which would send an electronic notice of execution (NOE) to the investment manager.

Gordon Marchand, vice president and treasurer of Yeager, Wood & Marshall, Inc -- an investment manager with $700 million under management -- says that having an electronic NOE is "very important," to an investment manager.

Once in receipt of the NOE, the investment manager would use Omgeo's application to divvy up the block trade into allocations and fire that back to the broker. At that point, the information would flow through Omgeo's Oasys -- the product widely used to transmit allocation information between the buy and sell sides. While flowing through Oasys, the trade would be enriched by Omgeo's ALERT database, which contains internal broker account numbers to ease settlement.

Through Oasys, via OAM, the broker would send back confirmation of the allocations, at which time the investment manager, broker/dealer and custodian bank would all receive matched affirmations verifying that all three parties agree with the details of the trade.

Omgeo's Tierney contends that the average manual trade costs broker/dealers around $16. Automating a trade with tools like OAM, he claims, can reduce that to $4. However, Omgeo does plan to charge $1 per trade, bring the average cost to around $5. Tierney says that reducing the cost of a trade for brokers from $16 to $5 is compelling.

In fact, Marchand, who is also the president of the Investment Council Association of America, says that his firm will almost certainly use the product when it is released around the end of the second quarter. He does however have some suggestions about how the product can be improved.

Marchand says that investment managers will certainly not want to log into the application throughout the day to check and see if any NOEs are waiting for their attention. Rather, he says, it would be better if Omgeo could come up with some sort of alert mechanism so that managers are notified that an NOE is in the system, at which time they can parse out the allocations.

Omgeo's Tierney says a number of functional enhancements have been proposed for the system and the company will sift through them and implement the improvements it deems appropriate.

OAM, says Tierney, could be the first step towards straight-through processing for investment managers that can't afford to spend millions on integration projects. To that end, he says, OAM can be linked with an investment manager's portfolio-management and accounting system -- eliminating error-prone rekeying -- without leveraging the entire firm to pay for it.

Marchand adds that, for smaller investment managers where the portfolio manager and trader are often the same person, OAM could be a big help. "(In OAM), block trades are easily allocated into multiple accounts and it's something that you don't need a trader to do -- the portfolio manager can do it himself."

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