Order management systems win in NYSE-Nasdaq fight

Vendors of order management systems stand to benefit from the ongoing battle between the New York Stock Exchange and the Nasdaq Stock Market for equity trading supremacy, according to industry observers.

That's because regardless of which market ends up on top, the systems — software that allows traders to send their orders and handle reporting and settlement — will serve as the intermediary between the market and the traders.

"Order management systems are the beneficiaries of (market structure changes) because they own the desktop real estate at the buy side," said Henry Yegerman, director of research product management at ITG Inc., New York. "They can be the intermediary between the buy side and the sell side in delivering analytics and execution."

Those market structure changes, which all reflect the increasing importance and use of electronic trading, include:

• the Securities and Exchange Commission's Regulation NMS, which, among other things, requires that orders be sent to the market center with the best price for automatically executable orders;

• the merger agreement between the NYSE and all-electronic Archipelago Holdings Inc., Chicago; and

• the New York-based Nasdaq Stock Market Inc.'s planned acquisition of INET, the electronic trading platform owned by Instinet Group Inc., New York.

Mr. Yegerman explained that increased electronic trading and the corresponding growth in using direct market access tools, which allow traders to send orders directly to a specific market center, have shifted the balance of power to the buy-side trader from the sell side, with order management systems in the middle.

"The sell side is in a rush to meet the demands of the buy side, and the OMS vendors have become like a supermarket, providing shelf space for the sell side to the buy side," he said.

William Cline, managing partner in the global capital markets practice at management consulting firm Accenture, New York, said he wasn't sure OMS vendors would be the big winners from the market structure changes but said the importance of their role, already crucial in the trade cycle, would grow.

Mr. Cline added that as the changing market structure raises the profile of order routing — directing trades to various execution venues — successful order management systems will let buy-side investors write their own routing "rules" to achieve best execution.

"I believe the rules themselves will become very much a competitive differentiator," he said. "If my rules are more sophisticated than yours and they lead to better best-execution capability, I think that's where the competition starts."

For example, ITG's Triton trading system, which is designed for trading lists of stocks, specific strategies and quantitative methods, can be customized for each client and has the flexibility to be changed before a trade or during a trade, explained Ian Domowitz, a managing director at ITG.

"If you tie that level of functionality directly back to the OMS — Triton integrated with the OMS — you take as much of the friction out of the system as possible," he said, which adds value for the buy-side trader.

But Robert Hegarty, vice president of securities and investment technology at TowerGroup, Boston, said managing orders, which is what OMS vendors do, and executing orders, which is what brokers or electronic trading systems do, are two very different functions. While OMS vendors provide access to execution platforms, mainly algorithms, they do not help traders get best execution, which is the ultimate goal, he said.

"Right now there's clearly a race for (sell-side) brokers to provide algorithms to institutional clients" through the OMS vendors, he explained. Eventually, however, buy-side firms are likely to bypass the OMS and go directly to the broker's trading platform.

Not surprisingly, OMS vendors see themselves in a good position.

"Providers are in a pretty unique spot. We're probably the most sought-after tool that portfolio managers and traders are using," said Eric Soderberg, vice president of global marketing The MacGregor Group Inc., a leading OMS vendor based in Boston.

At OMS rival Charles River Systems Inc., Burlington, Mass., Steve Engdahl, director of product management, also thinks OMS vendors can take advantage of the changes in U.S. stock markets.

"We are following all the same market developments — Reg NMS, the consolidation of ECNs and exchanges, algorithmic trading growth and the continued trend of the reduction in average trade size," he explained.

OMS vendors need solid technology, flexibility and the right connectivity to algorithms and other trading functions because buy-side traders are increasingly looking for more control over the trading process, Mr. Engdahl said.

"We have that," he said.

But others in the industry — namely trading system developers — think that while OMS vendors will maintain their position as trade order handlers, they are likely to get squeezed out of the buy-side trading function.

Vijay Kedia, president of FlexTrade Systems Inc., Great Neck, N.Y., added that as buy-side traders seek greater control, the desktop computer becomes a more powerful tool for them. FlexTrade develops independent algorithm and other trading systems.

"As more power shifts to the buy side, the desktop naturally becomes more and more important," Mr. Kedia said, adding the trend might not necessarily play into the hand of OMS vendors because it could decrease the need for buy-side traders to use brokers, which are connected through the OMS vendor.

"Order management systems make it easy to access broker algorithms but don't make it easy to decide which broker to go to, and many don't have real-time market data," he saidd. "Our systems are connected to end points, to execution points, whereas OMS systems are a way to conveniently send trades to brokers."