Last year, single-dealer portals, such as Merrill Lynch’s MLX, were seen by major broker-dealers as a way to reduce costs, increase customer satisfaction, and reach new markets. Customers would get a one-stop shop for research, data and trading, and the dealers would get access to smaller institutional clients that they hadn’t previously reached.
Today, that promise has been mostly unfulfilled and some of these initiatives may struggle to simply maintain their funding.”MLX does a decent job,” said Dana Stiffler, an analyst at AMR Research. “But in a lot of cases the dealer wanted to make the process easier for themselves, but I don’t think they really looked at it from the customer point of view.”
The strategy of using portals to reduce costs by providing self-service options for institutional investors backfired, Stiffler said. “The core of very educated, self-reliant investors or users is a very small group,” she said. “There are a lot of people who need a lot more hand-holding.”
Moreover, the portals were primarily intended for small and medium-sized clients-the large institutional clients prefer direct computer-to-computer connections instead of the browser-based interfaces of the portals. These smaller clients, who trade in smaller volumes and amounts, traditionally do business with regional broker-dealer firms by phone and fax. This creates a double burden for the large Wall Street firms that want to move these clients over to portals-to convince these clients that Wall Street cares about them, and to teach them to use the technology. So far, it’s a burden that hasn’t been met. “The mid-sized enterprises’ demand for these kinds of services hasn’t been established,” Stiffler said.
Merrill Lynch officials admit that this past year has been a learning experience. “I think we have a more insightful view of their place in the range of electronic connectivity or e-business options,” said Michael Packer, managing director of institutional e-business at Merrill Lynch. Still only a third of the cash equity trading business at Merrill comes in electronically, Packer said-and that includes direct computer-to-computer connections. “It remains a largely manual industry,” Packer said, though he insists that MLX usage will grow. “Whether you’re talking about large clients, small clients, or information-savvy clients, there’s just enormous room for moving that interaction online in one form or another.”
Packer said Merrill Lynch plans to maintain its investment in electronic trading, including portals, though he downplays the importance of electronic trading. “There’s been a tremendous over-focusing on electronic trading,” Packer said. “If you talk to most buy-side firms, it’s not necessarily the focus of the relationship. We execute on their behalf, that’s true, but a huge proportion of the value that we provide is not in the execution of the trade itself. There’s a lot of day-to-day activity where the focus is more on our insight into the client’s portfolio, tax accounting, our understanding of what their objectives are, and offering them structured solutions that help them achieve their objectives. Much of that value is not amenable now-or in the immediate future-to electronic means.”
At Salomon Smith Barney, executives are finding that old investor habits are tough to break. For example, institutional clients still prefer to talk to salespeople and traders to get color throughout the day and to transact trades, said Nancy Wohlbruck, the firm’s director of global fixed income e-commerce. But they are starting to come to Salomon Smith Barney Direct for background information and “most of our clients at this point are getting at least some content using the Web site,” she said.
Wohlbruck made a point of saying that her company plans to maintain its level of investment in the portal. Traffic won’t continue to grow indefinitely, she said-there are some limitations to how investors want to use the site. “But we haven’t hit the cap yet. …And we still find that it’s the most efficient and least expensive way to distribute this material,” she said.
That said, if the economy remains in its funk, cutbacks are inevitable, said Sang Lee, an analyst at Boston-based Celent Communications. “If this trend continues, all areas of the investment bank will suffer, including the portals.”
At least one user limitation, however, has been overcome. Salomon Smith Barney’s customers used to complain routinely about how difficult it was to use portals if they had relationships with multiple dealers. “They didn’t want to come in in the morning and type in three or four URLs and remember three or four user IDs and passwords,” she said. “They were asking us for a way to log in once and get access to all the dealers’ Web sites.”
The solution, for Salomon Smith Barney, was to invest in SecuritiesHub, which offers a single-password sign-on, commingled content, and easy click-through access to the member dealers’ individual portals through its BondHub fixed income multidealer portal. “We’ve seen a tremendous increase in traffic to our Web site as a result,” said Wohlbruck, though she wouldn’t comment on actual numbers.
Indeed, the multidealer model is gaining momentum as the single-dealer portal is faltering. There are more than a dozen multidealer portals like BondHub, both for fixed income and equities. One example of a multidealer equities portal is TheMarkets.com, now in beta testing and due to go live later this year. “TheMarkets.com might save portals,” said Larry Tabb, an analyst at TowerGroup. “That’s where we see the direction of portals going.”
TheMarkets.com-which gives institutional investors a single point of access to the research of the firms with whom they already have relationships-also boasts Merrill Lynch, Morgan Stanley Dean Witter, Goldman Sachs, Deutsche Bank, UBS Warburg, Salomon Brothers, Credit Suisse First Boston, and J.P. Morgan Chase as backers. “It just makes more sense,” said John Goeller, director of electronic trading at Credit Suisse First Boston Corp. “From a user’s perspective, if he has to access five or 10 Web sites, it makes sense to access it from one channel.” CSFB is a member of several consortia. Besides TheMarkets.com, it’s involved in Market Axess, and SecuritiesHub.
Merrill Lynch’s Packer said his firm is committed to the development of multidealer portals. “We’re in a decent list of them-SecuritiesHub’s BondHub, BondBook, TradeWeb, TheMarkets.com, FXAll, Atriax, TheDebtCenter, and various platforms in Europe. Some of them are very important not only to clients but to the structure of the industry.” For example, he said, a bond aggregation portal called TheMuniCenter allows the major municipal bond houses to redistribute to shops around the country. BondBook, which focuses on the fixed income credit markets, allows an anonymous anyone-to-anyone forum that could increase the ease of trading and liquidity.
Yet another approach to the aggregation portal is FinancialOxygen’s BankOxygen site, which focuses on the needs of a targeted group of end-users-independent banks-rather than a specific product line. There are some 20,000 independent banks in the country that the large money center banks like J.P. Morgan Chase couldn’t reach because it was too expensive, said Robert Oxenburgh, FinancialOxygen CEO. BankOxygen hopes to connect J.P. Morgan Chase, Citibank and Bank of America to these independent banks by offering the banks news, research and investments-such as commercial paper, Federal funds, and, this fall, bonds-targeted specifically to them. “They own about a trillion dollars worth of fixed income and overnight investments,” he said. “But they currently buy this over the phone from regional broker-dealers.”
But despite some promising results, overall the multidealer portals haven’t done much better than the single-dealer portals-at least so far. And while some argue it’s too soon to pass judgment since multidealer portals have only been around for a year, other contend that the business concept is fatally flawed. Chris Crosby, SVP and director of marketing at Minneapolis-based broker-dealer Dain Rauscher, said there’s a fundamental reason why portals won’t succeed. “It’s focused on achieving economies of scale for the seller and not attuned to the needs of the buyer,” Crosby said. “People are treating relationships as if they’re fungible, as if they can be replaced by machines.”
Indeed, Crosby has found that there’s not nearly the level of client demand for automation that might be expected-or at perhaps hoped for. Regional broker-dealers such as Dain Rauscher provide value-added services to smaller institutional clients-advisory services, money management consulting-that big Wall Street firms only have time to offer to their biggest clients, not to the smaller institutions. “They may be second- and third-tier to Wall Street, but they’re first-tier to us,” Crosby said.