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EMS Growing Pains

As brokers debate the economics of execution management systems, Barclays and Citi have quit the EMS game. Meanwhile, Goldman Sachs has gone broker-neutral and Morgan Stanley has decided to fly solo.

Independent providers of broker-neutral platforms, however, claim that they carry more algorithms and reach more brokers while not being attached to an investment bank at all. According to Stuart Breslow, CEO of RealTick, the firm's platform provides the algorithmic trading suites of more than 40 broker-dealers across equities, options, futures, and foreign exchange for the Americas, Europe, Middle East, Africa and the Asia Pacific region.

Breslow contends that while some of the broker-owned platforms enable other brokers to add "algo racks" to their front ends, it's not a level playing field in terms of services. "One integration to a multibroker platform is different than a single-broker platform that is adding some other brokers," he says.

EMS Economics

Meanwhile, market observers contend that the rationale for brokers owning an EMS has changed. "Back when Morgan Stanley and Goldman Sachs established these platforms, it was an important strategy to bring order flow into the firm and an important mechanism where clients could pay Morgan Stanley and Goldman for execution-related strategies," says Laurie Berke, principal at Tabb Group, the market research firm. But, "Is that a core driver to business today? Do buy-side firms allocate revenue because a broker has a desktop?" Berke wonders.

Today, all of the brokers can get paid through an EMS without owning their own platform, notes a sell-side source whose firm operates an EMS. "I don't know a single broker who can't be paid by a single independent, such as FlexTrade, Portware, Trading Screen or ITG," he says.

Even so, Goldman and Morgan Stanley feel their EMS offerings differentiate them in the market.

To keep up with the fast pace of technology and changing client demands, Goldman releases three versions of REDIPlus a year that are based on incremental functionality. "Most of the enhancements are incremental, and they come from our user base," explains Goldman's Nangalia, who adds that Goldman also has upgraded the 10-year-old platform's infrastructure from an older Microsoft architecture so that it can be delivered via a web browser. This approach to development has increased REDIPlus' user base among broker-dealers, hedge funds and proprietary trading firms, Nangalia says.

Tabb Group's Berke notes that Goldman's REDIPlus has a long history in the market and is well integrated on the buy side. "They've spent a lot of money on new upgrades and customization. They've kept it up," she says. "In part, that's because a lot of important clients still use REDI. It may very well hurt them if they let it go."

In addition to competitive differentiation, brokers also are running EMS platforms to avoid paying fees to other multibroker platforms that are sending them order flow. "Each broker has to pay a fee to house its algorithms on that EMS, so essentially that fee is going to their nemesis," says the head of U.S. equity trading at an asset management firm who requested anonymity.

This is part of the economics, according to Tabb Group's Berke. "You have to ask if those charges in aggregate are equal to or greater than the cost of maintaining front-end platforms," she says.

Operating an EMS is, in part, a defensive strategy of the broker, observes Don Carey, global head of Bloomberg EMS Solutions. "Virtually everyone is charging the brokers 10 mils per trade or a series of different fees per connection," he says. "When they have their own platforms, they are protected." However, because Bloomberg doesn't charge the brokers a fee for connecting to EMSX, the brokers are keen to connect their algorithms and pre-trade analytics to Bloomberg over other alternatives, Carey contends.

The Future of the EMS

Nonetheless, buy-side firms want to consolidate their activities on fewer platforms. "I don't see the platforms being anything other than broker-neutral," says the anonymous asset manager. "I don't think you'd supply the platforms and not offer access to other brokers."

Bloomberg's Carey confirms that the trend is toward fewer EMS platforms as opposed to more, adding that it's the "proliferation of so many EMSs on the desktop that led many on the buy side to go to broker-neutral and multi-asset class platforms." According to Carey, brokers will continue to evolve their strategies to serve their clients, but ultimately they will move toward creating applications and content and not toward building trading platforms. "I think they will look to distribute those applications through the established EMSs," he says.

For Goldman's part, Nangalia says REDI is going to be more multi-asset and more global. While REDIPlus grew up in equities, Goldman Sachs has expanded into options, futures and FX. It just launched a product in the rates area, and it is working on the fixed income space now, Nangalia reports.

On the other hand, Thomas Kim, CEO of technology provider UNX, wants to disrupt the legacy EMS model. "Clearly, when it's a broker-owned platform they have more control over the content and services they make available," he says. Aiming to shake things up, UNX is offering the Catalyst trading platform, an open .NET architecture and software development kit that allows brokers to integrate their tools and customize and disseminate their own products and services through the broker-neutral platform. UNX already has signed up several brokers, including Credit Suisse AES, Goldman Sachs for pre-trade analytics, and UBS for direct market access and algorithms.

Goldman's Nangalia agrees that the buy side is going to consolidate the number of EMS platforms they use. "For them to go from five to two makes sense," he says, noting that part of what's driving the consolidation is the convergence of functionality, such as the ability to trade futures versus international equities. "But that doesn't mean the number of EMS systems in the market will go from five to two." Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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