Front Office in Focus07.20.2018
State Street’s planned purchase of Charles River Development aims squarely at the most rapidly expanding growth area in financial institutions: the front office.
Charles River’s order management system and execution management system are used as primary solutions in their respective areas by 20% and 12% of buy-side trading desks, good for top-3 placing in each category, according to Greenwich Associates research published in the second quarter of 2018.
State Street’s technology business is more oriented toward the back and middle offices, covering investment custody, servicing and administration. Charles River gives State Street a foothold in the highly competitive OMS and EMS spaces, to which the buy side allocated 20% and 3% of their technology budgets in 2017.
“These trading tools are only getting more critical to the buy side, as compliance requirements grow and markets continue to become more electronic,” said Kevin McPartland, head of market structure and technology research at Greenwich.
For State Street, the $2.6 billion purchase of Charles River better positions it to tap into an $8 billion industry-wide revenue pool for front-office services, he company said. Privately held CRD had a bit more than $300 million in revenue last year.
From an expansion-opportunity standpoint, the back office set of services is “pretty mature”, while the middle office is about 40% outsourced, with more to come. That’s according to State Street CEO Jay Hooley, who spoke on a conference call Friday morning.
The juice is in the front office. “People are feeling pressure to consolidate systems, get at data and replace tired proprietary systems,” Hooley said. “The front office has the most explosive growth opportunities.”
Much of the “change and churn” ties back to technological advances, particularly around data management, that have accelerated systems obsolescence.
“Many of the tools and capabilities that we’re now able to offer in the data space, just weren’t able to be offered five years ago,” State Street President and Chief Operating Officer Ron O’Hanley said on the call.
O’Hanley specifically cited analytics around ‘big data’ and unstructured data as a “relatively new market with new offerings.”
This acquisition represents not only a significant investment in our future but also the recognition that the ability to assist clients in managing their data needs and extract insights from their data is increasingly the most important differentiator… https://t.co/KiQ2giwVf5
— Frank Smietana (@FSmietana) July 20, 2018
“We’re taking things that weren’t being done, or were being done in a fairly primitive way, and putting it in a much more ‘industrial strength’ data analytics package,” O’Hanley said.
State Street expects the purchase to close in the fourth quarter.
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