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EMS Growing Pains

As brokers debate the economics of execution management systems, Barclays and Citi have quit the EMS game. Meanwhile, Goldman Sachs has gone broker-neutral and Morgan Stanley has decided to fly solo.

As 2011 gets under way, institutional traders are grappling with a mix of electronic execution platforms that provide connectivity to algorithmic trading strategies, dark pools and trading analytics. With limited real estate on the buy-side desktop -- even as traders stare at three or four screens -- more and more firms are moving to multibroker platforms that can handle multiple asset classes.

As buy-side firms gravitate toward broker neutrality, pundits are predicting consolidation in the sector. Judging from two recent transactions in the order management and execution management space, the broker-neutral trend is in full swing.

In December, ConvergEx Group agreed to acquire RealTick, a leading multibroker, cross-asset trading platform, from Barclays Capital. When the transaction closed in January, RealTick became an independently operated subsidiary of ConvergEx Group, whose parent is agency broker BNY ConvergEx Group. "We're much more of a technology company than a broker," asserts Craig Lax, executive managing director at ConvergEx.

Barclays became the second broker to pull out of the front-end trading software business in just a month. In November, Citi sold its sell-side ColorPalette OMS, which it acquired along with Lava Trading in 2004, to FlexTrade Systems, an independent technology provider. Citi had already sold off its buy-side EMS from Lava to TradingScreen in 2009. And at press time, TradingScreen acquired the exclusive license to Citi's multibroker Best Execution Comparison Service (BECS). Citi's decision to exit the front-end software business signaled that it was refocusing on its trading businesses.

"Strategically, we have chosen not to compete in the front-end space, as it is crowded and expensive," comments Dan Keegan, global cohead of Citi's Electronic Markets. By exiting the software business, Citi has chosen to focus on the intellectual property (IP) areas in which it can differentiate itself, namely smart order routing; global Citi Match, the firm's dark pool; and the principal trading and market marking capabilities housed within the company's Automated Trading Desk (ATD) offering, Keegan explains.

But what does the trend mean for other broker-owned execution platforms? Will more brokers sell off their EMS units to broker-neutral providers?

Two of the industry's top bulge-bracket brokers operating electronic execution platforms insist that they are not budging from the buy-side desktop. Goldman Sachs, which offers REDIPlus, and Morgan Stanley, which operates Passport, say they intend to keep running their EMSs. Both firms boast that they have garnered critical mass on their institutional clients' desktops and that they have gained the technology expertise through consistently updating their platforms.

"We want to provide our clients with a desktop trading application that serves as a window into Morgan Stanley's content," says Bill Neuberger, cohead of electronic trading at the investment giant. "That content may take many forms, such as customized trading engines or detailed pre- and post-trade analysis."

But one buy-side trader, who spoke on the condition of anonymity, contends that the broker-owned platforms are not perceived as broker-neutral. "Every broker scrambled to get their own EMS, and everyone required it to be broker-neutral," says the buy-side trader. "But it was never broker-neutral because it was owned by a broker."

The Broker Neutrality Race

Over the past decade virtually all of the major brokerage firms snapped up broker-neutral platforms -- Citi bought Lava, JPMorgan acquired Neovest and Lehman Brothers acquired Townsend Analytics' RealTick, which Barclays subsequently acquired along with Lehman Brothers. The only bulge-bracket firm that didn't acquire a front-end application, according to sources, was Credit Suisse.

"Brokers jumped into the front-end software business because it had become essential to the trading business," says Goldman Sachs' Rishi Nangalia, managing director and head of the REDIPlus EMS. "It made sense -- either you have critical mass, or you're not in the game."

Even as the other brokers shed their front-end software businesses and the independent providers continue to gain traction -- the Flextrades, the Bloombergs and ITGs have morphed into EMSs -- Nangalia is not losing sleep over the changing EMS landscape. "In our case, we have critical mass; we are a market leader," he says. "It's too important an asset for us to give up. We have the desktops, and many of the other brokers may feel they don't have the critical mass to support the expense base."

Since acquiring REDIPlus from market maker Spear Leads & Kellogg, Goldman has built up the platform organically over the past 15 years. With 13,000 users in the market, of which 5,500 are actively trading each day, operating REDIPlus is akin to running an independent EMS software business, Nangalia suggests. "We built the front end to be agnostic to product, to asset type and to where the flow goes. We're trying to make REDIPlus a broker-neutral product that is more than equity-oriented assets," he says.

"You can use REDIPlus to send order flow to other brokers," Nangalia continues. "We don't have everyone, but we have the infrastructure to connect to every broker."

Morgan Stanley, however, has taken a different approach. The investment bank opted not to make Passport a multibroker platform. "Morgan Stanley's strategy is to emphasize the firm's electronic trading capabilities rather than becoming a software vendor for the industry," according to Neuberger. By not taking on the complexity required to deploy other brokers' algorithms, the firm has kept its overhead and expense base lower, he suggests.

Over the years, Morgan Stanley has maintained a consistent technology spend on desktop applications, and it has acquired the expertise of deploying it with Internet connectivity or via Citrix, Neuberger adds. "The ongoing cost of running Passport becomes more manageable since we have significant in-house expertise developing and deploying it," he says.

Still, like many of the single-broker platforms, Morgan Stanley argues that it does support connectivity to other brokers when a buy-side user requests it -- making its algos available through other broker-neutral platforms, for example. "If a client gets bigger and needs broker-neutral EMS access, we're happy to consult with them," says Neuberger, adding that the firm has relationships with all of the major independent broker-neutral providers. "When their interest is to work with multiple broker algorithms and DMA offerings, we're happy to work with the client as their execution consultant to recommend one system versus another." 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

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