September 16, 2007

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.