As the sluggish U.S. economy forces Wall Street belt-tightening, the downturn in trading volumes in U.S. equities, options and futures is also affecting the trading platform business. Asset managers and hedge funds are looking to consolidate the number of order management systems (OMSs) and execution management systems (EMSs) on their desktops.
Both systems play a critical role in running pre-trade compliance checks, achieving best execution, and routing orders to broker algorithms.
"This has been a bad year--a year when you don't spend a lot of money and you do what you're required to do," says Mark Israel, VP of business consulting for the investment management practice at Sapient. "Having more EMSs and more OMSs is not a way to add money. Having fewer is a way to save money," says Israel, who calls this mindset "software rationalization."
While there are at least 15 OMSs and EMSs vying for the buy side's business, Bloomberg, Charles River Development and Eze Castle seem to be garnering the most market share, according to one buy side trader who asked not to be identified.
Grappling with tighter budgets, asset managers and hedge fund managers are eyeing ways to lower their tech costs, but at the same time they need sophisticated trading technology to stay competitive in a market dominated by high-frequency traders and fragmented liquidity venues.
"It's a challenging environment," says Harrell Smith, head of product strategy at Portware, an independent provider of execution platforms. "Buy side assets under management are down, which means budgets are constrained and firms are taking a long, hard look at all decisions about investments in IT." Certainly, the brokers are being squeezed on the commission side, he adds.
It's important to understand where the money is in the OMS-EMS business. According to several industry sources, some OMS/EMS vendors charge the broker a fee for connecting each client to their particular trading desks. "The race is in getting from the buy side blotter to the sell side destination," says Mark Kuzminskas, director of equity trading at Robeco Investment Management in Boston. "The network is the prize and the money maker is the routing hub," Kuzminskas says, explaining that brokers pay connection fees to certain OMS and EMS network operators. In addition, some OMS and EMS providers charge the broker fees for each client connection, such as to the cash, program and derivatives desks.
Brokers pay on average about $500 a month for the connection between the buy side client and the routing hub. A money manager that has 60 brokers could be generating $360,000 per year for the network provider. However, some brokers that have traditionally subsidized the cost of the EMSs are now subsidizing less of it, according to sources. Alternatively, many buy side firms are using Bloomberg's EMS platform, EMSX, because it's free to customers that subscribe to the Bloomberg Professional service.
Tighter budgets have already caused several brokers to exit the single-dealer platform business, including Barclays Capital, which sold its RealTick EMS to ConvergEx. Citi sold its buy side OMS to Trading Screen and its sell side OMS to FlexTrade. Now, rumor has it that ConvergEx, an agency brokerage firm owned by Bank of New York Mellon, has put Eze Castle and RealTick up for sale, and is reportedly looking to fetch $800 million to $1 billion.
But as a result of needing to pay multiple brokers for research and other services, the buy side is looking at consolidating relationships with brokers, which in turn has led them to cut the number of EMSs on trader desktops. A sign of the trend: Goldman Sachs is spinning off Redi Technologies, its electronic trading platform, to make it broker-neutral, which is more attractive to buy side clients that want to trade through different brokers. Goldman plans to keep a 49 percent stake in Redi Technologies but open it to outside investors, according to published reports.
The buy side tends to pay hard dollars for their OMSs, but it tends to pay soft dollars for the EMSs, letting them execute through the sell side's algorithms and reach exchange venues and dark pools. "Regardless of the EMS I'm using, as long as it's doing what I need it to do, I wouldn't look to change it," says Kevin Chapman, head of trading forAllianz Global Investors. "I'm more interested in picking up the different tools that give me better executions, or connecting to a dark pool that will give me the flow I'm looking for." His firm implemented Bloomberg AIM as its OMS and EMSX as its EMS in 2010.
Beyond Cost Savings
In addition to searching for the best OMS and EMS to cut costs, buy side firms are also looking to consolidate the number of systems on their desktops. In the past, multiple EMSs were the norm on trade desks, often because of trader preferences and system functionality. "What's happened is that many of the OMSs and EMSs have been able to fill in missing EMS functionality," says Charles River's Driscoll. As a case in point, Charles River has spent the past six or seven years rewriting Charles River Trader, the firm's OMS, into a so-called OEMS.
"It's simpler," says Driscoll. "That seems to be resonating with folks. It has easier and more complete workflows, auditing and compliance." Charles River provides the EMS functionality at no additional cost, he says. As part of the EMS, clients need time and sales data and typically Level 2 depth-of-book exchange data, which are an additional cost. "That causes firms to rethink it," Driscoll says. His firm is working with data vendors "to provide an integrated data service and lower cost solution that will fit into buy side organizations, while some of the higher-end EMS vendors tend to struggle to justify their overall cost and added complexity," he says.
The idea of a single OMS/EMS is still the Holy Grail. "There is a convergence between EMS and OMS, so the OMS has been trying to be EMS very successfully and EMS has been moving into the OMS more successfully," says Philippe Buhannic, CEO of TradingScreen, a global multi-asset EMS provider. "For the benefit of the client, it would be [better] to have one system that does both. The clients want one system going across asset classes so they don't have to re-key, interface," and also to reduce costs.
In addition to Charles River Trader, other OMSs, including Fidessa with Latent Zero and Linedata with Longview, have added EMS functionality. TradingScreen began as an EMS and has developed an OMS for hedge funds, letting them do performance calculations, too, Buhannic says.