Algorithmics charts new business strategy

Ron Dembo, founder and chief executive officer of risk management systems provider Algorithmics, has said that within a few years, one third of Algorithmics’ revenue could come from the company’s new alliance with Bloomberg, announced in January. Algorithmics is charting an ambitious new course with Bloomberg to supply all of its risk analytics to Bloomberg’s trade order management system customers. The new direction replaces Algorithmics’ current risk application service provider (ASP) strategy, which landed the company business with the prime brokerage units of Morgan Stanley in June 2001 and Credit Suisse First Boston in March 2000.

Analysts who cover the risk technology market were surprised by Dembo’s forecast. “I’m somewhat sceptical,” said Peter Keppler of Meridien Research, based in Newton, Massachusetts.

A host of risk ASPs were launched in 2000 to deliver lower-cost risk management technology to the lower end of the market, but market reception has been cold. “The ASP market has not taken off by any stretch. It’s turned out to be a marginal revenue enhancer as opposed to a substantial stand-alone channel,” said Keppler.

Dushyant Shahrawat, securities industry institutional technology analyst at consulting firm TowerGroup in Needham, Massachusetts, said at least eight to 10 risk ASPs have folded since 2000, including JP Morgan derivatives services spin-off Cygnifi in October last year.

On the other hand, the current target date of January 2003 for a comprehensive launch of Algorithmics’ services on Bloomberg could coincide with an upturn in confidence among financial firms in risk technology outsourcing, according to Shahrawat. “By the end of 2003 and 2004, you're going to see a revival of the ASP model,” he said, adding that higher spending on internet technology by the buy side indicates growing comfort with the medium among investors. Also behind the market’s return to risk ASPs, said Shahrawat, are improvements in security technology and competitive pressure.

Shahrawat called the alliance between Algorithmics and Bloomberg a win for both companies. Bloomberg gets to expand its risk analytics for trade order management customers beyond current parametric value-at-risk and scenario analysis to include more market risk functions, collateral, credit risk and asset-liability management tools. Shahrawat said these new offerings will help ensure Bloomberg survives a coming shakeout he expects for trade order management system providers – slimming the current field of 15 vendors by half.

Meanwhile, Algorithmics gets access to markets where it has had low penetration: second-tier investment managers and sell-side institutions. According to Tanys Lancaster, who heads the Bloomberg side of the alliance in New York, of Bloomberg’s 700 trade order management systems users, 60% are on the sell side and 40% on the buy side. Should the current slump in risk technology spending continue, access to the sell side could be important for Algorithmics. “The sell-side is outspending the buy side pretty remarkably in this current economic environment,” said Shahrawat.

According to the current timetable, market risk services for G-7 government and corporate bonds, agencies, equities, and municipals will go live in November. Credit risk and collateral management functions could be added by the third quarter. Asset-liability management rollout has not yet been scheduled. Derivatives instruments coverage for the G-20 will be completed by the end of 2003.

Algorithmics’ head of global sales for the alliance, Jason Nabi, based in London, said that by the end of 2003, he expects around 50% of Bloomberg’s current 700 trade order management system users, plus 200 new users, to use Algorithmics' services on Bloomberg. Nabi says 100 new and existing Bloomberg clients are currently in the pipeline to implement the services.

The new services will be available at no additional charge. To access its trade order management services, Bloomberg requires all of a client’s trading room personnel to have Bloomberg monitors. Current charges per monitor are $1,295 per month.