By John D’Antona Jr.
While 2018 was a banner year for M&A bankers specializing in the OMS/EMS space, the wave of consolidation has left some concerned, according to several industry executives. After three notable independent OEMS vendors got snapped up by much larger industry players in the second half of the year – State Street acquired Charles River Development, SS&C’s picked up EZE Software and Virtu is in the process of acquiring ITG – many of their buy-side clients have been left with a range of questions and concerns around conflicts of interest, data privacy and the future of these software platforms.
“Many of the fund managers I speak with are watching how the coming months play out very carefully,” said Guy Cirillo, an industry consultant who for many years served as Credit Suisse AES’ head of business development, a role that saw him manage all the firm’s vendor relationships. “That’s not to say there’s distrust on anyone’s part, but given the tremendous amount of critical data that flows through these systems, caution is the watchword.”
It is this concern that has Virtu working to head off any issues of perceived conflicts already. In November, CEO Doug Cifu noted that the trading technology and execution services provider will build a committee of global clients to oversee the firm and ensure that data is protected.
But some remain skeptical. One buy-side trading executive, who asked to remain nameless, expressed reservations about Triton becoming a part of Virtu. “There are all kinds of real and perceived conflicts on the Street these days. But integrating a formerly independent OEMS platform into one of the industry’s largest market makers does raise legitimate questions. Ultimately, I don’t think a firm as established as Virtu is short sighted enough to do anything nefarious, but that reality is certainly in the back of my mind.”
Been There, Done That
Concerns over neutrality and data privacy when an OEMS provider gets acquired by a trading firm is nothing new. As industry veterans will recall from 2006, when ITG acquired Macgregor, there were immediate concerns about whether the then-leading OMS would remain a broker-neutral platform as ITG integrated its own trading algorithms and TCA software into it.
At the time, ITG officials said they were aware of these concerns and would create a corporate structure that would keep the Macgregor OMS business separate from the trading business, recalls Cirillo.
“The concerns today, and response from the acquirers, are not too dissimilar to the situation a decade ago with ITG’s acquisition of Macgregor. In my opinion they handled the integration, transition and potential conflicts around Macgregor very well,” he said.
Support and Development Questions
Another source of concern for clients of these acquired OEMSs is the lack of commitment to continued platform development and client support, say rival executives.
According to Robert Dykes, CEO of TORA, an independent provider of a cloud-based OEMS platform, the ultimate demise of the Macgregor OMS is a prime example of what can happen.
“Almost always, the acquirer is focused on strategic platform integration plans and their ‘core’ business, so it’s easy for the acquireree’s planned product upgrades and client enhancements to get pushed off, sometimes indefinitely,” he said.
Efficiencies of scale – otherwise known as “synergies” – will also start to take their toll on the level of client service the OEMS clients will receive, which can manifest itself as slower response times and less knowledge of the product, according to Dykes.
“The senior relationship managers and others who know the clients’ business priorities intimately are often redundant to their counterparts at the acquiring firm. No matter how thorough the notes in the CRM may be, this will leave a gap in client knowledge, especially when a less experienced team on the support desk is left to pick up the slack,” he added.
Spencer Mindlin, an Aite Group Analyst focused on capital markets technology, noted; “It’s the uncertainty that the market should be focused on, because when companies get acquired, they often go through long periods of change which tends to impact day to day business performance. That said, these acquirers all have deep pockets, so it’s possible that these OEMS vendors could get an injection of resources. The question is whether the acquirers see these firms as businesses they wish to grow, or merely as pillars in a grander business plan, which is typically the case,” Mindlin noted.
All in all, the consolidation that occurred in the OEMS space last year presents opportunities and challenges for all OEMS vendors and their clients, notes TORA’s Dykes.
“Clearly these last six months have shown what a competitive space this is,” he said. “All I can control are the commitments I’ve made to my clients to advance our platform and service levels. Ultimately they will hold us accountable for delivering and will select the platform that best meets their needs, which is all we can ask.”