September 26, 2006

What Is an EMS? An execution management system (EMS) is a software-based platform that facilitates and manages the execution of securities orders, typically through the Financial Information eXchange (FIX) protocol.

EMSs have four key features: a trading blotter, connectivity, multiple destinations and real-time market data. The trading blotter is composed of an order entry screen where users initiate and monitor trading activity. Users can access brokers' direct-market-access (DMA) capabilities and algorithms to carry out electronic trading strategies. The platforms enable both single-stock and portfolio trading capabilities.

An EMS offers multiple destinations to which to route a trade. Through the EMS platforms, users can connect to major exchanges, electronic communication networks (ECNs), alternative trading systems (ATSs), crossing networks and multiple brokers. Real-time market data enters the system from a combination of external feeds from exchanges and market data providers and, in some cases, internal proprietary data from the EMS provider.

It is worth pointing out that, by definition, DMA platforms either are single- or limited-destination systems. Although a number of DMA players call their order entry and management portals EMSs, TowerGroup draws a distinction between an EMS and a pure DMA platform.

In comparison, order management systems (OMSs) were designed as tools to allow firms to manage and document their trading activities electronically. With an OMS, firms easily can look back in order to analyze their orders. Since this modest beginning of OMSs as trading blotters with FIX engines, they have extended the breadth and depth of their functionality significantly. Today's OMSs have emerged as portfolio management systems with functionality that ranges from pre-trade through post-trade support.

TowerGroup expects EMSs to follow a path similar to the one OMSs have followed through their evolution: The EMSs will increase the breadth of their functionality, adding analytics, portfolio staging capabilities and tighter systems integration. As a result, they will continue to substitute for OMSs in smaller asset management firms or hedge funds.

It Can Be Done

At the same time, the success of EMSs has been a rallying cry for OMS vendors, and TowerGroup is watching as OMS providers invest in changes in the architecture of their systems to support integration of real-time market data. Much of the development in distributing market data and enhancing ticker plants, however, is likely to make this area of competitive differentiation a moot point in the coming months. We also expect to see more investments to support the portfolio- and algorithmic-trading capabilities of traditional OMS players.

In short, TowerGroup anticipates that peripheral functionality in the two types of systems increasingly will converge. But we do not foresee the availability of only one integrated system because the two platforms' core offerings serve different purposes and constituents. Although the EMS and OMS applications are similar, significant differences exist.

Use EMS, OMS or Both?

Most buy-side shops today are using an OMS, an EMS or both. The specific needs of each shop will drive its choice for adoption:

1. Traditional asset managers of any size will use an OMS to take advantage of broader functionality, including portfolio staging, compliance and post-trade support.

2. Traditional asset managers that trade infrequently and are less concerned with speed of execution will be well served by an OMS, which still provides options for routing trades, and provides the connectivity and compliance tools they need in order to manage their business successfully.

3. Traditional asset managers that trade actively, engage in list or basket trading, and require cross-asset-class trading capabilities will implement one or more EMSs.

4. Midsize or large traditional asset managers will deploy multiple EMS platforms on the desktop in order to placate traders who have individual preferences, to access broker liquidity offered only through a particular platform and to access third-party broker algorithms that may not be available through their current OMS.

5. Small hedge funds are more likely to forgo an OMS and use an EMS because they desire speed of execution.

6. The few large hedge funds will employ multiple EMS platforms and also use an OMS.

Of course, there likely will be more exceptions than perfect fits to these rules, and the reality is that the nuances and culture of each firm will drive its trading software deployment strategies.