Cha-ching! Every time a buy-side firm sends an order to a broker or an alternative trading system (ATS), you almost can hear the sound of a cash register ringing. That's because the order management industry is moving toward a transaction model. Several software companies that provide order management systems catering to buy-side firms are collecting a connectivity fee from brokers that want to receive order flow from buy-side institutions. Yes, software companies have found another way to cash in on the electronic trading wave. This is not necessarily a bad thing. After all, the OMS vendors that originally provided investment managers with portfolio management and compliance tools need to fund research and development to keep up with new trading functionality demanded by their clients. At least 20 brokers supply algorithmic trading strategies and some offer pre-trade analysis tools — OMS providers need to recoup the costs of integrating these tools with their offerings. But should a value-added software provider want to become a toll collector? That certainly will change the relationship with its institutional clients and brokers. The problem is that large buy-side clients already are paying hundreds of thousands of dollars a year — some are paying up to $1 million — in software licensing and maintenance fees. Therefore, they expect the vendors to integrate broker algorithms and evolve their products as part of the cost of staying in business.
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