The cost of order management system connections for securities trades, often unknown to money managers and others on the buy side, is coming out of the shadows, sources said.
That's due to several factors, including reduced commissions to brokers that were paying for these connections themselves; the potential for brokers to pass on these costs to the buy side; and the disclosure of trading execution costs under MiFID II that could lead to transparency on connectivity.
Those factors could alter the landscape of how providers of order management systems, which execute securities trades, are paid for access to their systems. Those payments traditionally are done through non-disclosure agreements between brokers and providers that have been in place, in many cases, for more than a decade, sources said.
"There's a larger narrative taking place in asset management," said Spencer Mindlin, capital markets technology analyst at Aite Group LLC, Boston. "There's a convergence of disclosure, a sell-side revenue crunch, changes in how (order management systems) will be used in the future and how those changes will affect OMS business. OMS providers will have to adjust or go out of business."
What has spurred that money management narrative has been regulatory requirements under the European Union's Markets in Financial Instruments Directive II, which mandates unbundling and disclosure of research and trade-execution costs. And while MiFID II doesn't specifically require connectivity cost disclosure, some money managers are asking, "why not?"
Order management system "providers are unwilling to negotiate with the sell side on costs, which are in the range of 7-10 mils (.0007 to .001 cent) per share traded and/or a flat monthly connectivity fee," said Nanette Buziak, managing director, head of equity trading at Voya Investment Management, New York. "Put this in context of our current environment where commission costs have continued to drop dramatically as compared to where they were in the 2003-2005 time period when these (non-disclosure agreements) were established." Average commission rates in 2005 were 4 cents to 5 cents per share; the current average is 2 cents per share, Ms. Buziak said.