TMCnet News
NEED AN EMS OR WILL THE OMS DO?(Wall Street & Technology Via Thomson Dialog NewsEdge) With advances in electronic trading changing the demands on traders' desktops, many buy-side traders are trying to determine the best route to the ideal trading workstation. Do they need an execution management system or will their order management systems do the job? --- Buy-side traders are under a constant assault from vendors and brokers alike offering the latest and greatest versions of execution management systems (EMSs) and order management systems (OMSs). This, amid the action of daily trading, makes it difficult to decipher which features are essential and merit a change of systems, and which are "nice to have." Now that so much trading volume is electronic, traders' desktops are festooned with screens from multiple brokers and vendors, each offering a specific niche function, such as access to certain trading venues or markets. And because splitting trades across multiple venues is such a big part of trading today, many buy siders have multiple EMS screens on their desktops. Many also have an OMS, sometimes dating from pre-electronic-trading days, that performs vital functions such as allocations, position management, and communication between portfolio managers and traders. The question for traders becomes, "Do I need an EMS, an OMS or both, and if I need both, how do I integrate them?" Although the range of trading firms is vast and diverse, some useful generalizations can be made about what type of firm needs each system. Generally it is difficult to manage more than $5 billion in assets under management without at least an EMS, according to Jeromee Johnson, a senior analyst with TABB Group. [Ed. note: Johnson recently left TABB Group to join start-up 3-D Markets.] A firm with fewer than $5 billion in assets can obtain a direct-market-access (DMA) platform from its broker as part of its commission schedule and "get by with that" instead of an EMS, he says. "If you require significant automation of your trading and the ability to really customize that [such as customizing algorithms], you need an EMS," Johnson continues. "If you need workflow management between portfolio manager and trader, and extensive compliance functionality - including pre-trade compliance reviews - and accounting functions for multiple geographies, you need to get an OMS." A trader who participates heavily in intraday trading and employs arbitrage strategies also likely will need an EMS, adds Sang Lee, managing partner with Aite Group. But traders who primarily deploy long-only investment strategies usually are well-served by an OMS, he says. The problem that has arisen is that it is virtually impossible to get all of the above in a single platform. Order management systems are typically on-site installations that reach deep into the organization. They were designed to help the buy side manage workflow and hold down operational costs - in many cases before the rise of ECNs and fragmented markets - and were pressed into handling increasingly complex trading functions for which they were not originally designed. The EMS platforms are generally newer and were specifically built to manage electronic trading across multiple venues and deliver algorithms and charting functions to the trader. Many are delivered remotely on an application service provider (ASP) model, so integration between an EMS and OMS is not a fait accompli. Integration Issues Although the prevalence of FIX and recent developments such as the FAST protocol aid integration between the EMS and OMS, it is common for information entered in one system not to appear in the other, due to syntax disagreements or timing miscues. This can cause expensive errors, such as exceeding buy limits on a certain security that were entered into the OMS but did not populate the EMS data fields. "Combining the two different architectures is difficult," TABB Group's Johnson says. "Your EMS basically is a [thin] client ... that can be run on a desktop," he explains. As a result, EMSs often are delivered remotely via ASP. "An OMS architecture is a very heavy-client, database-centric architecture" that traditionally requires local installation and tight database and systems integration. "If you are doing compliance, you need to be able to lock that stuff down. You cannot have the same level of speed as an EMS," Johnson notes. This perhaps explains why about 80 percent of buy-side firms have more than one trading platform - either a combination of EMSs and an OMS or multiple EMSs - on their desktops, according to a TABB Group report released in December 2006. About 10 percent use an EMS only and another 10 percent use an OMS only. Firms that use an OMS only, such as New York-based Pzena Investment Management, tend not to be frequent or intensive traders, but have the need to apply risk models and allocate shares and proceeds across multiple accounts. Pzena is a value-investment firm with $30 billion in separately managed portfolios and a long-term investment horizon. It uses Indata's Investment Management System (IMS) in conjunction with proprietary modeling software, according to Keith Komar, the firm's chief administrative officer. Pzena's portfolio managers and two traders use IMS for both an OMS and a portfolio-accounting system. For Pzena, the ability to use the NYFIX network backbone - a provider of FIX services - to reach ECNs, broker algorithms and trading desks, and seamlessly create order tickets in IMS is key. "As long as we get the variety and locations we need, we are happy sticking with the functionality we need," Komar says. "We don't want to put something on top of the system that forces you to enter the orders in two places and introduce errors." Firms that have trade-intensive investment strategies but do not have extensive downstream client accounts typically use an EMS for most of their trading and compliance functions. One such firm is Van Buren Advisors, a Chicago-based multistrategy statistical-arbitrage hedge fund, which has been using InfoReach TMS since its inception in 2004. "We needed the system for two major reasons," explains Alex Pasman, managing member, Van Buren Advisors. "We trade large portfolios, so we need a system with which we can quickly summarize the status. A table with numbers does not help us grasp what is going on - it has to be graphical. Second, we needed to be able to plug in analytics that tell the algorithms how to execute." Van Buren reviewed several EMSs provided by the firms' prime brokers, but none of the systems met its requirements, nor did the firm want to be tied to one broker on account of the system, according to Pasman. He notes that the firm uses both the EMS and OMS functions in InfoReach, which Aite Group classifies as an EMS. Clear Differences For some, the differences between an OMS and EMS are clear: The OMS is great for portfolio construction and accounting, but not for today's trading environment. The proliferation of "overhead" - the invocation of compliance rules - into the trader workflow is a concern for Jersey City, N.J.-based Lord Abbett & Co., which has long used the XIP OMS from Macgregor (now part of ITG), but is considering purchasing an EMS for its growing trading needs, according to Richard O'Keefe, director of trading systems at Lord Abbett, which runs about $116 billion in assets, 70 percent of which is in equities and 85 percent of which is electronically traded. With market volatility increasing, the compliance rules that are placed into XIP by the firm's portfolio managers don't necessarily get streamlined for traders' use and slow down their workflow, says O'Keefe. "One would argue the overhead of delay leads to financial overhead," he asserts. "You'd rather your traders are making an informed decision about timing rather than being held up by compliance." An EMS explicitly created for traders' needs would alleviate this problem - assuming that there is close integration with the vital rules written into XIP, O'Keefe stresses. Lord Abbett's predicament is typical of OMS users - after nine years, XIP is so deeply integrated into the firm's process and workflow that new trading software must be made to work with it. The degree to which the OMS and potential EMS can be integrated is a "subject of angst," O'Keefe concedes. Ideally the integration would use a direct application program interface (API) rather than a FIX connection. Because Lord Abbett is a big user of Liquidnet, whose liquidity-discovery process involves "scraping" the OMS blotters of its clients, it's in Lord Abbett's interest to continue to support that stored procedure. As soon as directed trading to individual brokers via FIX connections occurs, Liquidnet becomes unavailable. Although ITG is implementing FIX interfaces for other EMS vendors, "That doesn't give us the same availability," O'Keefe explains. "Once you assign a trade to another system, it is not available to other venues. You minimize your liquidity options." But O'Keefe recognizes it is difficult to ask two or more vendors to keep their development cycles in sync, such that a serviceable dedicated API exists between each of them. So Lord Abbett is considering building its own integration backbone and insisting that each vendor write to that backbone, he relates. "Our workflow and liquidity considerations benefit from a stored procedure," O'Keefe says. "If we took that on ourselves, it would be a single API into our OMS and multiple APIs with these vendors. Not every firm has the resources to undertake that - maybe we even don't. But if it is of value in the long term, we will fund it. We are going to start articulating who will work with us and in what manner." Integration Through M&As Sensitive to the fact that many of their clients face this issue, vendors recently have sought to provide closely integrated trading modules that clients can choose a la carte or as a suite. This has been achieved largely through strategic mergers and acquisitions, since the predecessor solutions came from the e-trading or the portfolio-management camps, respectively. In 2006, ITG purchased Macgregor with the intent of integrating ITG's XIP OMS - which has the top market share in the OMS world, according to TABB Group - and the Macgregor Financial Network (MFN) order-routing network with ITG's other products, including the Triton EMS and the Posit matching network. In a "multiyear project," according to Mark Wright, director of global product development at ITG, the vendor is creating an integrated EMS-OMS dubbed Triton-X 1.0. The newer Triton platform is built on multilevel n-tier technology, which allows functionality to be added selectively without rewriting the whole application, he claims. Essentially, the best features from Macgregor XIP will be added to Triton - "any legacy technology that remained in XIP, we are replacing," Wright adds. "The top priority is to make sure this new offering continues to address the needs of the large institutional customer," he says. But with the broad range of customers using ITG's expanded suite, the challenge will be not to overwhelm traders with too many choices, Wright notes. ITG's integrated suite based on Triton couldn't come too soon for some traders, particularly those who rely on the MFN network, accessed through XIP. Robeco Boston Partners, a value manager with about $11 billion in assets, uses XIP as well as the Instinet Newport and Goldman Sachs' REDIPlus EMSs. XIP is mainly used to access algorithms provided by brokers with whom Robeco Boston Partners has commission agreements, relates Seth Ruskin, VP and senior equity trader. Newport, a broker-neutral portfolio-trading EMS, and REDIPlus, the most widely deployed EMS in the buy-side world, are used when it is important to split an order across multiple venues, something that is more challenging to do via XIP, he explains. According to Ruskin, the XIP OMS sometimes "locks up" when receiving a fill back from a broker; sometimes orders must be canceled and replaced because XIP does not allow more than one simultaneous session with a given broker, he contends. As a result, the EMS systems are often used as a backup for the OMS, Ruskin says. "XIP is not fast enough to deal with electronic markets in some cases - in one case I was over selling as a result of this," he comments. "The EMSs are nice because you can make changes on the fly." Yet the OMS, despite its flaws, is essential - it is used by all of the firm's portfolio managers and trading assistants, and it also is the main means of access via FIX to the outside world, Ruskin adds. This would seem to make Robeco a prime candidate for ITG's Triton integration strategy. "My preference is to use the OMS - it's cleaner, not having all the systems open on the desk at the same time," says Ruskin. "In an ideal world, I'd do it all from one cockpit." Is One System Even Necessary? Hearing similar preferences from its clients, BNY ConvergEx Group is working toward all-in-one integration from the portfolio manager to the trader and back to the compliance officer. ConvergEx includes the Sonic EMS and the Eze Castle OMS, and began offering an OMS with an integrated EMS module in June. The key to providing an integrated system was to consolidate all the platforms on one code base, according to Eze Castle COO Jeff Shoreman. That meant the two platforms had to be part of one company, he says. "It has to be a single set of source code," Shoreman explains. "You could link two separate vendor platforms, but you could not in one click check compliance and route out to market. You really have to swap source code - that was just never going to happen between two companies." Yet this is precisely the approach of Linedata Systems, manufacturer of the LongView Trading OMS. The company recently struck an agreement with Goldman Sachs to allow simultaneous trading on the REDIPlus and LongView platforms. Linedata rebuilt LongView on the Microsoft .NET n-tier architecture in 2003. The goal is to eliminate the double-keying and swiveling-chair syndrome that leads to lost productivity and errors for the traders who must now toggle between EMS and OMS platforms, says Gavin Little-Gill, SVP of product management. Not to be outdone, another recently created vendor, Fidessa - resulting from the merger of sell-side EMS vendor Royalblue and buy-side OMS vendor LatentZero - released an Order Execution Management System (OEMS) in April. The OEMS is aimed at traders who realize they now need an EMS but do not want to lose the compliance rules attached to the order as it leaves the OMS, according to Martin Hakker, EVP of marketing at Fidessa. "Why lose all those rich features and account information, once the order leaves the OMS?" he asks. "You want an end-to-end audit trail so you can see everything that has happened through the life of the order. If you pop off an order from the OMS to an EMS that has its own trail of everything it did, somehow you have to piece the two trails together. Where is the ROI? Doesn't it make more sense as an integrated environment?" Maybe so. But for many traders the multisystem environment will probably hold sway for a while, and this is not necessarily something they are losing sleep over. At Iridian Asset Management in Westport, Conn., the order management system is the primary engine for transmitting orders to brokers, while dark pools and algorithms are primarily accessed through two EMS platforms, relates Jason McLean, director of trading, who declines to identify the platforms. Iridian is a value-based shop whose trading style is 95 percent long-only, covering large- and mid-cap shares on behalf of mutual and pension funds. The firm sends about 15 percent of its orders through its EMSs, and the rest are managed through its OMS, according to McLean. In order to avoid the pitfall of committing orders in the EMS that violate rules in the OMS, orders are staged for inspection before being executed, which adds a few moments to the trading process, he concedes. But for Iridian's purposes, McLean says, it's worth the wait and is just a part of doing business. "Someone who has only had one model [EMS-only or OMS-only] might find having to enter stuff twice kind of a pain, but some have been doing it for a long time," McLean says. "It is literally a matter of seconds to put it in. I think the people who complain about it may be those who are not used to doing so. We have not experienced any difficulty." Resisting Change While he acknowledges that he could generate and manipulate orders faster in an EMS and then use a FIX drop copy to pass the information back to the OMS, it's unlikely McLean will reverse the workflow in order to take advantage of the EMS capabilities "because then I would have one more thing on my desktop and something I'd have to learn," he says. Such resistance to change likely will continue to challenge the convergence of the OMS and EMS on the buy-side desktop. In addition to traders' work styles, the degree to which a firm uses an EMS or an OMS also has something to do with the nature of its relationship with its brokers. If a substantial portion of a buy-side firm's business is through traditional brokerage models, chances are a firm will need an OMS to manage those relationships, particularly when commissions and step-outs are involved. These clients are also likely to receive free or subsidized EMSs from their brokers, but may not necessarily feel obligated to use them frequently. The more self-directed or strategy-oriented traders who want more control over the life of the trade once it enters the market are more likely to need and make frequent use of an EMS, analysts say. "The EMSs we do have feature algorithm suites, anonymity, etc.," confirms McLean. "But the other part of our business is still very much tied to traditional sell-side broker business, where we send trades to gain research chits, meetings with management, access to conferences. It is still very much tied, budgetwise, to the traditional brokerage model, so we don't trade as much electronically." Ultimately, firms are not rushing to replace systems. According to TABB Group's report, about 30 percent of firms were considering a technology upgrade or addition; just under 10 percent were considering replacing an OMS. And features that were formerly bells and whistles - particularly algorithms - are now must-have offerings. Increasingly, clients will want adaptability built into their systems, such as the ability to accept new algorithms on the fly using external file technology such as XML, TABB Group says. In the vast field of platforms available to the trader, it seems that a true end-all, be-all buy-side desktop is still years away. But as long as the workflow is seamless across systems and the technology aids - rather than saddles - efficiency, traders apparently will be satisfied. --- Defining the Basics The lines between the OMS, EMS and DMA continue to blur. But there are fundamental differences among each platform. Order Management System (OMS) The OMS has its origins in buy-side portfolio accounting and emerged in the late 1980s. An OMS typically is deployed on-site and is reliant on integration with local databases. Order-routing functions began to appear in the OMS in 2005. Functions: - Allocations - Clearing - Commission management - Compliance - Reporting Execution Management System (EMS) The EMS, which originated on sell-side desks over the last few years, was created to generate automated trading strategies. The platform is best suited to portfolio, program and list trading. An EMS typically is deployed remotely via an application service provider (ASP). Functions: - Custom transaction cost analysis (TCA) - Dynamic algorithm customization - Order and execution automation - Portfolio and program trading - Sell-side order handling Direct Market Access (DMA)/Market Aggregation DMA originated with the emergence of the ECNs and day trading in the early to mid '90s and is best suited to single-stock orders. It can be deployed as an ASP or on individual desktops. Functions: - Aggregation of depth of book across multiple markets - Aggregation of multiple markets on one screen - Low-latency direct connections to marketplaces - Order slicing - Market sweeping Source: TABB Group, vendors --- Lack of Integration Creates Challenges Below are some of the challenges traders say they face due to a lack of integration among their OMSs and EMSs: - Traders find it difficult to manage transaction cost analysis (TCA) because some OMSs are set up to receive broker allocations but do not display parent and child orders showing all the destinations to which the order was sent. - The same issue can arise when traders send orders to their EMS to be distributed across multiple venues; the OMS only records that the order was sent to the EMS. Traders must then rekey the day's trading activity or use an end-of-day FIX drop copy from the EMS to populate the proper fields in the OMS. - OMS systems are built to facilitate workflow between portfolio managers, traders and compliance officers, but not necessarily to facilitate high-frequency electronic trading in a fragmented market. Compliance checks built into OMSs can sometimes bog down high-velocity trading, yet traders must be advised of the rules while trading. Thus there is demand for orders created with more intelligence built in and transferred seamlessly from OMS to EMS. - Most OMS/EMS integration consists of FIX messaging between the two platforms. Orders are often staged in the EMS before being sent to market in order to be inspected for errors that either originated in the OMS or are the result of syntax disagreement between the FIX format used by the OMS and that used by the EMS. This can cause delays in getting orders to market. - The reverse syndrome comes from orders generated in the EMS without OMS compliance rules built in - another opportunity to create errors. When orders are completed and fills return from the marketplace, a FIX drop copy is sent to the OMS, but this is not necessarily done automatically or in real time. Often it is done at the end of the day. - The commission-sharing and soft-dollar arrangements between brokers and buy-side customers are often built into and tied to the OMS. As a result, traders find it more convenient to perform trading from the OMS so that commissions and step-outs are correlated with trading activity in one system. But the sluggishness and limited market access of some systems limits best execution capabilities. - Popular block-trading networks, such as Liquidnet, are built around standing inventory in traders' OMSs - each day these platforms scrape the blotter to deliver liquidity to the network. In some OMSs, the blotter becomes unavailable to such platforms when trading is directed to an EMS or other brokers or venues. -D.S. --- What Traders Want In Their Desktops Below, ranked in descending order of importance, is what traders say they want in their desktops: Must-have functionality/features: 1. Analytics, particularly TCA 2. Access to algorithms 3. Integration with other systems 4. Ease of use 5. Trading abilities (e.g., order manipulation) 6. Good relationship with vendor 7. Broker neutrality Nice-to-have functionality/features: 1. Single desktop platform for all trading, TCA, analytics, allocations 2. Ability to trade in crossing networks and direct trading simultaneously 3. Pricing scheme flexibility Source: TABB Group, Dec. 2006 --- EMS and OMS Directories Check out Advanced Trading's exclusive directories of execution management systems and order management systems online at advancedtrading.com/directories. OMS and EMS Vendor News For a round-up of recent upgrades and releases, check out our chart with the latest developments at advancedtrading.com/oms-ems-roundup. advancedtrading.com It may be time for the buy side to swap out its OMSs: advancedtrading.com/showArticle.jhtml?articleID=196801266 While some predict that an enhanced EMS will emerge as the only trading system, don't write off the OMS just yet: advancedtrading.com/showArticle.jhtml?articleID=196900794 Copyright 2007 CMP Media LLC. All rights reserved. Copyright 2007 CMP Media LLC |