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A simple question came up recently in a conversation – how many new Fixed Income trading venues are there?  I could not think of anywhere th...

Thursday, 23 July 2015

Fintech Innovation: What could a new buy-side OMS vendor be worth?

Further to "Fintech innovation: Buy-side OMS" some notes on the potential value of a new buy-side OMS platform.
The first thing to note is that a new buy-side OMS would have to deliver the three main parts of functionality that are offered by existing systems:
  • Portfolio modelling/what-if/rebalancing
  • Compliance
  • Order and execution management
The new platform would differ in the sense that the revenue model would be radically different.  Existing offerings have the old fashioned revenue model of license fee plus annual maintenance plus professional services for implementation plus professional services for upgrades.
 
Depending on the maturity of the product the revenue mix for incumbent vendors varies, but for most cases the vendor makes more money from professional services than anything else.  This creates an inherently conflicted business model - the firm makes money from selling the software and then makes money from professional services to resolve any issues in the software.
 
As we see in "What does it cost to run a buy-side OMS and EMS environment?" from the perspective of the buy-side the cost of the software is a small part of the overall price tag. 
 
What does this mean?  Every year the vendor makes £x and the buy-side spends (conservatively) £3x on everything else.
 
Professional services is a good revenue generator but for a vendor selling enterprise software can end up with a significant cost base.  And when a member of the implementation team leaves in many cases that reduces the revenue available to the firm, as the implementer resumes work in a freelance capacity and diverts revenue from the vendor.
 
A modern buy-side OMS vendor would attempt to capture as much as possible of that revenue stream by ensuring that the offering is fully featured and then there is no need for the buy-side to spend more money on the other components as listed in "What does it cost..."
 
So, if CRD is on the market for $400million (allegedly) then a new vendor of similar size as measured by number of clients would generate four times the revenue.  If margin is maintained then it would be valued at $1.6billion - roughly £1billion.

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