Stuck in Neutral?
Besides comprehensive and synchronous functionality, perhaps the biggest demand on EMSs from buy-side traders is for strict broker neutrality - the assurance that no matter who owns the application, buy siders will be able to reach all markets and counterparties without interference or espionage from the system's owner. The increasing number of broker purchases of EMSs has some traders nervous - especially when it comes to increasingly important functions, such as trade cost analysis (TCA).
"The only real-time TCA is done by specific brokers on their own product," ICM's Olsen says. "They never make a mistake and it is always the best thing in the world. I would have to take a second look at CRD if it were to be acquired by a broker-dealer - their whole motivation might be different. I am happy that they remain independent."
Most of the EMS and OMS vendors interviewed by Advanced Trading expressed a strong desire to remain independent. However, there are different approaches to remaining broker-neutral, even if broker ownership becomes inevitable.
One method is to place a software vendor's application source code in an escrow account that will be maintained by an independent third party, notes TowerGroup's Gavin Little-Gill. This would act like a "poison pill" against brokers interfering with the code for their own advantage. Little-Gill says he is not certain of the extent of this practice.
Another approach, one that is used extensively by Portware, is to sell one's technology on a "white label" basis to brokers, so that they have the benefit of offering the technology without the stigma of owning it outright. This practice, however, is largely invisible to the client and is not immune to tampering or alteration, according to industry observers.
Further, there are brokers that have emerged with an exclusively agency-only, all-electronic model from the start, such as EdgeTrade, which has trademarked the term "Execution Management System," according to its CEO, Joe Wald.
The devil is in the details when a broker acquires an established broker-neutral system, however.
At Citigroup, Lava features a multibroker rather than a broker-neutral model, says Joel Steinmetz, managing director of the buy-side business group. Some brokers that offer EMSs allow their clients to trade with multiple brokers, he notes, but they keep track of where the client is sending commissions. Lava, however, uses a sponsorship model, in which brokers sponsor the platform for their buy-side customers, so Citigroup is a layer removed from buy-side transactions, Steinmetz explains.
"When you use Lava you transform yourself into that broker; if you use Merrill for a particular transaction, Citi has no clue that you are using Merrill," Steinmetz says. "It's about whether or not your commissions are observed."
BNY allows its clients to "step out" commissions to a third-party on a post-trade basis with Sonic/ConvergEx, which, when combined with its agency business model, represents an added layer of neutrality, says the firm's Cammarata.
As with almost any electronic trading trend, the EMS-OMS story continues to be marked by ebbs and tides of independence and acquisition, stand-alone functionality, and integration. Despite issues of overlapping capabilities, integration and ownership, as the buy side increasingly seeks to execute its own trades, it looks like EMSs are here to stay, and more providers are joining the swim just as the traditional vendors are being swallowed up by the big fish.
Royalblue, for example, traditionally a supplier to sell-side trading desks globally and to the buy side in the U.K., has just released its Fidessa EMS platform in the United States on a managed ASP basis, with a FIX network offering a connectivity boost. Not to be outdone, Nexa Technologies, a subsidiary of clearing firm Penson Worldwide, also launched an ASP-based trading system called Aspect TMS, which uses technology from InfoReach, a major EMS supplier to hedge funds.
And it seems that there will be no slowdown of activity in the space any time soon. TowerGroup predicts that at least one of the major EMS providers will be acquired before the end of 2006.
For more on the convergence of execution management systems and order management systems, see "Research Watch," page 46.