By Michael Chin, Managing Director, Global Head of Trading, Thomson Reuters.
Fund managers are gaining the upper-hand over trade order and execution systems vendors, who respond with flexible technology.
A significant change is underway in the relationship between the buy-side and the providers of the technology to process trade order management and execution.
Budgetary constraints, stricter compliance oversight and the momentum towards extending electronic trading to a wider range of asset classes and geographical jurisdictions make fund managers more demanding. Meanwhile, the number and variety of systems offered by vendors mean they can be more selective.
In addition, technology expenditure is shifting from the sell-side to the buy-side, and as a result, vendors are forced to reassess their client base and product suite.
An increased demand for timely and accurate analytics and risk management emphasises the need for a seamless integration of data throughout the investment cycle, from the front- to the back-office: pre-trade idea generation, execution, post-trade confirmation, end-of-day compliance and final settlement.
The buy-side has greater choice, mixing and matching order management systems (OMS) and execution management systems (EMS) from different vendors to meet their specific requirements, opting for the combination most appropriate for the scale and focus of their businesses.
This conclusion might seem counter-intuitive. After all, many vendors have invested in and promoted ones-top, fully-integrated OMS and EMS systems. But in reality, OEMS products have often proved unsatisfactory because of the inherent differences in functionality of the two systems and because they often lack the flexibility needed by individual buy-side firms.
A better alternative is to offer discrete OMSs and EMSs that can be synchronised to provide a seamless process that accommodates the different roles that each system plays in a transaction. OMSs within buy-side firms transmit trade order communications between portfolio managers and their dealing desks, and provide pre-trade and post-trade workflow to support internal operations. EMSs are at the point of interaction between the dealing desk and the market, managing and executing orders in real time.
There are three main functions within the transaction process, from pre-trade to execution to post-trade that must be incorporated in a successfully joined-up OMS and EMS.
First, there is staging, which is the link between the OMS and EMS leveraging the FIX protocol, the standard electronic language for order communications and trade execution. In the staging process, the OMS interacts with the EMS. A portfolio manager has a trade idea, notifies the OMS, and the details appear on the dealer’s EMS screen or blotter.
Before it arrives, automated risk checks are undertaken to ensure fund covenants aren’t breached and counterparty limits aren’t exceeded, as well as basic verifications such as confirmation that there is enough cash available to make a purchase or sufficient securities to make a sale.
When the transaction is completed, details of the trade then flow back from the EMS to the OMS to update positions and profit & loss.
Second, the EMS operates in real time. The trader slices up the order using algos, and the EMS manages information updates immediately. Access to real-time market data and the ability to rapidly filter noise are essential to make trading decisions especially in a low latency environment populated by high frequency trading.
However, this can cause a disjunction in a buy-side firm’s internal process, because most OMSs are not designed to handle real time updates which can lead to a bottleneck in the process.
Third, the combined system has to meet regulatory requirements for achieving best execution. Transaction cost analysis (TCA) is typically conducted through a real time interactive tool within the EMS that includes a course-correction facility, and supplements the post-trade compliance check.
This desire and requirement for accurate and trustworthy real time data provides some vendors an opportunity as buy-side firms adopt open, mix-and-match OMS and EMS platforms. They can safeguard information integrity by channelling content that is a “single source of truth”.
However, in a highly competitive marketplace, vendors are under constant pressure to deliver more features and functions, integrate more tightly, provide more data, cope with different asset types, and reach more markets. The buy-side’s cross-asset trading capabilities are rising and they have an increasing choice of execution strategies.
A survey of buy-side traders by a leading independent consultancy last year found that as equity execution venues and tools proliferate, traders want more control over order handling. Active traders require trading functionality such as configurable trading blotters, real-time depth of market data, charting, and alerts.
Traditional OMSs provide the baseline capabilities to route orders via brokers’ algorithms, but lack the additional controls and colour that give active equities traders an edge, according to the Greenwich Associate report ,“Move Over, Neighbor: EMS Establishes Residency on the Desktop” (April 2016).
Furthermore, it found that seamless integration of the front-middle-and back-office systems is no longer considered a luxury, but are instead a basic requirement.
Although in an ideal world, a fully-integrated OEMS that reduced complexity and costs would meet that need, the options increasingly available to buy-side firms means that they can construct their own unified system and modify or augment it as they enter new markets or trade new asset classes electronically.
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