The Buy Side Gets into the Vendor Business

Last week I sat down with Stuart Breslow to discuss risk management and his new job. As some of you may recall, Breslow is the former CEO of RealTick. Well, he has since jumped ship to become the managing director of Citadel Technology.

Citadel Technology is a wholly-owned subsidiary of Citadel Group, which also owns the $13 billion hedge fund Citadel. It was started in 2009 as an entity for the firm to license platforms and tools that were built internally out to its clients.

But last year Citadel Technology decided to sell its wares to the market at large, including firms that are not clients of Citadel. To accommodate this move it poached Breslow, who joined Citadel Technology in September.

A buy-side firm entering into the vendor space is hardly new, but it seems to me like it's becoming more of an occurrence. BlackRock has its Aladdin platform and Wolverine Trading has its Wolverine Execution Services (WEX) offshoot.

Even non-behemoths are getting into the act.

$3 billion hedge fund Rohatyn told Buy-Side Technology last year that it was going to market its data quality management system. Tradeworx, with less than $200 million under management, is the hedge fund arm of the technology company with the same name. There was also the ill-fated Derwent Capital Management, which closed last year. It tried to make a comeback as a vendor, and when that didn't work it simply sold off its Twitter-based trading platform.

Building platforms and tools internally is an expensive endeavor, especially when you consider how many proven third-party providers are flooding the market offering cheaper cloud-based options. But to make up for that expense it would seem that more hedge funds are becoming comfortable with the idea of commoditizing their internally-build systems. After all, it's the trading strategies and brain power that provide the real "secret sauce".

Hedge funds─especially those that are highly regarded─can sell on their reputations: "Hey, we know these systems work because our very own traders use them and we provided returns of X-percent last quarter!"

True third-party providers can counter by saying that they have a more focused view of technology, they have more technologists, and they have X, Y and Z already live on their platform.

They're both compelling arguments, but my guess is that if you're going to be a hedge fund going into the vendor space then you better go with the Full Monty: Go the road of Citadel and establish a full vendor arm, rather than trying to sell systems on a one-off basis.

Got a different opinion? Let me know. Email me at anthony.malakian@incisivemedia.com or give me a call at 646-490-3973.