September 26, 2006

As buy-side traders continue to take an increasingly active role in their own trading, a by-now-familiar pattern of acquisitions has surfaced again: Competing independent software businesses that emerged to solve a particular business problem have caught the eye of brokers. Looking to extend their share of customers' attention and wallets, brokers are snapping up technology providers one by one.

At the same time, other independent solution providers are extending themselves into the same market. This time, it's the execution management system space.

Execution management systems (EMSs) are desktop software applications that provide access to trading venues. Often, they place a layer of intelligence over this access, containing features such as algorithms, market data and predictive technology.

EMS users tend to be traders who work directly with Wall Street counterparties - other traders and, increasingly, automated transaction networks. More than ever, managing orders across multiple trading destinations - such as exchanges, brokers, crossing networks and ECNs - has become an important feature of the EMS.

Major EMS providers include Portware, FlexTrade, Nexa-InfoReach, UNX and Royalblue. Almost all of the major brokers also have their own EMS offerings; the most well-known are Goldman Sachs' RediPlus, Citigroup's Lava Trading and Lehman Brothers' recently acquired RealTick.

These are not to be (but often are) confused with order management systems (OMSs), which place shares in queue for trading but are principally concerned with back- and middle-office functions, such as portfolio rebalancing, accounting, and management and documentation of trading activity. OMSs have been around for about 15 years and were intended as a replacement for the paper blotter; originally, traders using the phone as their primary execution device manually entered trades into the electronic blotter. Traditional OMS vendors include Charles River Development, Indata, Advent, Macgregor (recently acquired by broker ITG) and Eze Castle (recently acquired by Bank of New York).

Tools for an Electronic Era

EMSs, on the other hand, are wholly offspring of the electronic trading era. They came onto the scene with the rise of day trading by individuals in the late 1990s and early part of this decade. The systems - initially called direct-market-access (DMA) platforms - originally were bare-bones applications that provided single-stock trade execution on electronic markets. They since have been appropriated and upgraded for professional use and now are known as execution management systems.

EMSs tend to be less demanding on computers than OMSs and, as such, can be operated remotely by an offering broker on behalf of a buy-side trading client. Often, they are provided to clients for "free" by brokers, which subsidize the systems' maintenance with the buy side's soft-dollar payments for research and other broker services.

Although they were borne as completely separate systems, the OMS and EMS are starting to bleed together. Traditional OMS vendors, such as Charles River Development, are working on developing EMS applications as closely linked companions to their bread-and-butter software, as well as introducing more EMS-like functions, such as real-time data, into their OMS platforms. At the same time, it is likely that EMS systems will gain broader customer reach, adding portfolio staging capabilities and analytics that once were the sole province of OMSs.

However, according to a TowerGroup report by analyst William Butterfield released in July, "We do not see the day when there will be only one integrated system available, because the two platforms' core offerings serve different purposes and constituents." TowerGroup believes that the EMSs will be favored by hedge funds with rapid trading needs and less-stringent accountability requirements; asset and fund managers will need the heavier reporting capabilities offered by OMSs. Still, that hasn't stopped brokers and vendors from trying to offer an integrated, soup-to-nuts application.