August 28, 2008

Electronic trading volume has increased substantially over the past several years. Improved technology, broader market automation, greater acceptance of algorithmic trading, and a greater degree of quantitative trading have supported the on-going growth and development of a range of trading solutions.

The use of trading technology reaches back to the early 1990s to the introduction of the order management system (OMS). The OMS substantially consolidated error-prone, paper-intensive trading processes prevalent at many firms into easily manageable electronic trading blotters. The benefits realized, the OMS evolved into the central hub of buy- and sell-side trading activity becoming the de-facto gateway to execution venues.

The emergence of electronic connectivity networks (ECNs), the introduction of direct market access (DMA), the emergence of algorithmic trading and smart order routing, and the proliferation of the OMS on the buy-side trading desks rapidly lead to the development of newer, more advanced functionality focused on the execution aspect of the trading process in the early 2000s. This range of solutions became known as the execution management system (EMS). Overlapping functionality and related purpose quickly gave rise to a blurring as to the particulars that constituted the OMS and the EMS. Surprisingly, the lack of distinction continued for several years. Only recently, with the maturity of electronic markets, routing, and algorithms, has the market fully recognized the differences among the two solutions.

The need for EMS functionality has become prevalent in conjunction with the broader use of complex trading strategies. Traders undertaking highly quantitative, high-frequency, intra-day arbitrage strategies rely heavily on EMS functionality as markets simply move too fast to manually lock in returns associated with minute spreads across positions in a single asset class. The challenges are compounded when expanded to multi-instrument, synthetic strategies. The formidable processing demands associated with such strategies require specialized technology that can handle enormous quantities of data and message traffic with negligible latency. These characteristics are found in the EMS. Firms with less intensive trading needs that require added focus on post-trade processing, middle and back office integration, compliance, and portfolio management generally find their solution to be an OMS. Firms requiring a mix of features either select one technology and make use of the limited features that solution provides in the other domain or select both technologies and integrate via FIX protocol.

A great deal of discussion in the public forum has centered around consolidation of the EMS and OMS into a true "hybrid" solution. The hybrid would potentially eclipse both distinct technologies by providing a single offering with full-featured EMS and OMS functionality. Aite Group research confirmed that EMS platforms are indeed being modified to include limited OMS functionality on a generic basis. However, there is no discernable indication that EMS solutions are being modified and developed with a full OMS functionality such that they would compete with the OMS as a true substitute.

Though there is no discernible trend toward a hybrid solution, there are indications that the industry may soon produce a more robust, better integrated EMS/OMS "package." Several acquisitions in the industry involving EMS and OMS providers, including the ITG acquisition of Macgregor Financial, the BNY-Convergex Sonic/Eze Castle combination, and the recent announcement by SunGard (providers of the BRASS OMS) to acquire Paris-based GL Trade support this assertion.

Aite Group does not envision that EMS providers will, as a group, divert the considerable resources necessary to "build-out" limited OMS functionality into a full-fledged hybrid offering. Such a strategic decision could easily dilute the quality of the core offering. However, the evolving trend in consolidated ownership noted above will facilitate superior integration of the two technologies and lead to a more robust comprehensive solution.