| September 4, 2006 - Order
management systems (OMS) and execution management systems
(EMS) have distinct functions around which competing
sets of software suppliers are clustered, but around
these focal points of the front end of trading technology,
all are rallying to meet securities industry demands
for best execution.
Those definitional distinctions may naturally have
been blurring for some time. "OMS and EMS occupy
rather unique spaces," notes Kyle Zasky, president
of Edge- Trade, a New York brokerage specializing in
algorithmic trading and high-tech execution management.
"Over the last couple of years there has been some
overlap in that functionality, where EMS has some OMS-like
functionality and OMS is trying to stretch into the
EMS space."
Larry Tabb, founder and CEO of Westborough, Mass. research
firm Tabb Group, sees technological improvements in
"everything from reporting to helping folks better
manage the execution side." He notes that there
currently are not a lot of OMS that do a good job at
aggregation, and "most of the OMS [vendors] partner
with an EMS or have integrated with one."
Incrementally--and in some cases through major retooling--front-end
developers are putting the technologies and tools in
place that firms need to accelerate their trading operations
into high gear; monitor, measure and manage their trading
functions; meet clients' benchmarks; and prepare for
the best-execution-related provisions of the U.S. Regulation
National Market System (NMS) and Europe's Markets in
Financial Instruments Directive (MiFID).
TradingScreen, for one, has restructured and improved
its data-capture capability on every trade, says Philippe
Buhannic, CEO of the New York-based multibroker, multi-asset-class
electronic trading platform provider. "We have
completely rebuilt our transaction database in an even
more efficient way than it was before," he says.
"Second, it's one thing to store the information
correctly, but it's another thing to make it viable
and efficient for the client. We also built a transaction
reporting module that allows the client to build any
type of report it wants using different types of data--transaction
data but also some analytics like VWAP [volume-weighted
average price] calculations, for example."
John Wightkin, managing partner of Quantitative Services
Group (QSG), a consulting firm and leading equity-analytics
provider based in Naperville, Ill., asserted that his
firm is "ahead of the curve in terms of being able
to deliver more rigorous and accurate analysis of best
execution but also being able to deliver it in a way
that is timely and meaningful for our clients. The people
that gravitate toward our product are those who want
the better analytics. We've seen off-the-bat the demand
for that, and it's increasing."
Giving clients access to a wide variety of trading
venues is one road to best execution, says Jeffrey Gavin,
senior product manager at Eze Castle Software, a Boston-based
OMS specialist with a sizable multistrategy hedge fund
client base. Eze Castle offers connection to more than
300 sell-side destinations. "As far as functionality
and tools we offer on the execution side," says
Gavin, "over the last year and a half to two years
we built out our algorithmic trading framework and we
currently integrate with over 25 algorithmic brokers."
Ian Domowitz, managing director at New York-based Investment
Technology Group and CEO of ITG Solutions Network, the
business unit that includes OMS vendor Macgregor, says
advances are just beginning and will result from long-term
commitment. "We certainly have not just started
on best execution simply because it's a buzzword,"
says Domowitz. "We already are offering a full
suite of both post-trade and pre-trade analytics reports
to the buy side. This is consistent with all best-execution
requirements, at least as we understand it today."
Regulatory Kick
Reg NMS and MiFID only serve to stimulate demand for
best-execution technology, though they add a regulatory
compliance element that clouds the overall systems picture.
Both sets of rules "put greater best-execution
requirements on both the buy and sell sides," says
Tabb. But there are other, concurrent factors, he adds:
"One is performance and fund board members looking
at cost. Second, the SEC is trying to force fiduciaries
to look at TCA [transaction cost analysis] in a much
stronger light. Third is algorithmic trading and the
push toward low-cost executions, putting more of the
onus on the buy-side rather than sell-side trader to
execute. The buy-side trader needs tools to be able
to see how well they're doing."
ITG's Domowitz agrees. "Reg NMS doesn't really
attack best execution per se, for the most part,"
he says. "Best execution really refers to the handling
of an order, as opposed to a single trade. So we view
best-execution requirements going well beyond Reg NMS.
... Some of this is being driven simply by the interest
of regulators in best execution as an overall paradigm
within which to nest both buy- and sell-side responsibilities,"
which, Domowitz points out, is replicated overseas under
MiFID.
"The regulatory environment helps to motivate
people, but the folks coming to us are those who want
to find a way to have a competitive advantage,"
says QSG's Wightkin. "They're coming to us not
only from a regulation standpoint; they also want to
understand their trading better and find an edge in
their trading that gives them a leg up against the competition."
The demand for better tools has been an "ongoing
evolution," says EdgeTrade's Zasky. Reg NMS helped
to stimulate the heightened demand of the past couple
of years, he says, "but we're finding that there's
a shift to the empowered buy-side trader [who has] fiduciary
responsibility to get best execution--however they define
it--and minimize market-impact costs. [Early-adopter
clients] have been relying on us for better executions
since 2001, before the concept of Reg NMS was on the
table."
Chris Kelley, SVP for product marketing at London-based
trading systems company Fidessa, adds: "I think
Reg NMS is related, but best execution lives apart from
that. We see a lot of client interest in making sure
institutional business can continue to be serviced appropriately
in the [NMS] environment. The challenge lies in ensuring
that your trading platform allows you to continue to
facilitate block business for institutional clients
at negotiated prices outside the best bid and offer."
Many of Eze Castle's aggressive-trading hedge fund
customers "are looking for the most cutting-edge
tools out there," says Robert Keller, VP of product
management at Eze Castle. Still, Reg NMS bears some
responsibility for the demand for better technology.
"Clients are definitely pushing us toward not only
building out our own tools but integrating with other
third-party systems," Keller adds.
Eyes to the Future
At ITG, new developments tie into the 2005 acquisition
of Macgregor and the creation of ITG Solutions Network,
a broker-neutral entity seeking to provide execution
management tools to the buy side. Says Domowitz: "We
are moving in a couple of different directions. We have
already linked the pre-trade suite ITG Logic as well
as post-trade TCA tightly into the Macgregor system.
That allows for a seamless exchange of pre- and post-trade
analytical data and provides the OMS network users more
efficient analysis of both their pre-trade expectations
and post-trade costs and risks during the execution
of their orders."
The next step, Domowitz says, is to provide extended
functionality for overall broker management, including
algorithm selection. It's an "ongoing effort,"
he says, to "provide both post-trade measurement
and analysis tools as well as pre-trade tools for efficient
selection of both vendors and their trading strategies
to the buy-side client."
ITG also expects to link the Triton execution management
system more tightly into the Macgregor OMS this year.
"This is the first step in the evolution of providing
execution management and OMS technology on the same
platform," Domowitz says. "The first stage
of the integration should be complete by the end of
the year. It is leading to a complete rewrite of the
trading system, which has been anticipated over the
course of the year." Incorporating EMS and OMS
functionality on the same blotter is a roughly two-year
project, he notes.
At Fidessa, the effort going forward is to "combine
the traditional best-ex monitoring options we already
offer with more sophisticated, analytics-based solutions
to provide a comprehensive toolkit for assessing execution
quality for any type of order," explains Kelley.
Fidessa is now focusing heavily on its new "blue
box" offering, which provides customers a range
of choices about how to make more economical use of
trading algorithms either through a suite of "canned,"
out-of-the-box software or by using a framework that
allows more ambitious clients to modify those canned
algorithms to suit their own needs or to develop new
algorithms outright. "All of this is in service
of helping Fidessa clients provide a better quality
of execution to their customer orders," says Kelley.
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