Market structure changes and cost pressures from the overhang of lower trading volumes in equities and fixed income are driving the buy-side’s demand for integrated order management and execution management systems (OMS/EMS), according to a new report by Greenwich Associates of Stamford, Conn.
While in the past the OMS/EMS was viewed as “unsexy plumbing” connecting the trading desks to portfolio managers, executing brokers and back office systems, these systems have become an important focus for the buy side. “Today traders need sophisticated tools to navigate through fragmented liquidity, unprecedented speed and increasingly demanding compliance and reporting requirements,” according to the report.
Buy side institutions spend between an estimated $1.5 billion to $2 billion per year on OMSs and EMSs for their trading desks, and Greenwich’s research shows that this annual spend has increased 10 percent over the past two years. Buy side firms are spending an average 44% of their technology budgets on OMS and EMS, according to Greenwich, underscoring the critical nature of trading desk technology.
Technology vendors participating in the study said their growth has been fueled by demand for compliance tools associated with new regulations and client-imposed reporting requirements, and by institutions’ increasing need to institutions need to keep pace with rapid changes in market structure with new analytics and connectivity products.
Among the buy side institutions surveyed, Bloomberg received the most mentions as an EMS and as OMS provider, while Charles River Development followed Bloomberg in the OMS category and ITG followed in EMS. ITG, Advent and Eze Castle rounded out the top five in OMS with Charles River Development, Advent Software and FlexTrade completed the five-most mentioned providers of EMS.
Though buy side firms want to upgrade their OMS/EMS systems to take advantage of the latest functionality, the major obstacle they face is cost pressures. “Buy side trading desks are facing real spending constraints amid a trend of slumping global trading activity,” states the report. In particular, Greenwich cites the trading slowdown in fixed income in North American and Europe, as well as in equities in North America and Europe. Because of the slump in trading, institutions view technologies that support trading technology as an area ripe for cost cutting as opposed to new investment, said Greenwich in its report.
Buy side firms have been cutting costs through staff reductions or avoiding new hires, the simplification of trading desk infrastructure and other measures, notes the report.
The study, entitled “Market Structure Changes Drive New Demands in OMS/EMS Technology,” is based upon interviews with 424 institutions globally on their use of OMS and EMS systems and other trading technology. In addition, Greenwich held in-depth conversations with the top five systems providers: Bloomberg, Charles River Development, Advent Software, InfoReach and Citadel Technology, about the key features of their systems. The report also gives firms advice on how to select an OMS or EMS system and compares features of the various platforms.
While many of the tech vendors are competing by offering systems dubbed an OEMS or integrated OMS and EMS, according to Greenwich, “The Holy Grail of a truly integrate OMS/EMS systems has yet to arrive,” states the report.
“Many of the platforms marketed as OEMS function more as side-by-side OMS and EMS as opposed to truly integrated solutions,” said Greenwich Associates’ Kevin Kozlowski, in the report. Despite some of the shortfalls in the integrated OMS/EMS solutions, a host of factors are driving the industry in this direction, namely cost pressures on buy side institutions, compliance demands from new regulations; tougher transparency demands from clients, and the fragmentation of liquidity associated with the proliferation of alternative electronic trading venues.
Currently only about 30 percent of the 424 institutions that participated in the study about trading infrastructure use integrated platforms. Greenwich maintains that existing end-to-end systems are viable solutions for smaller buy-side institutions and hedge funds, but won’t provide the full functionality for a larger institution that has more complex needs. Demand for such systems is being driven the hardest by buy side firms in Europe and Asia where there are fewer vendor options than in the United States.
However, tech vendors told Greenwich they believe that the integration of OMS/EMS is inevitable. Even though most large buy-side institutions still follow a best-of-breed model in both OMS and EMS, they are also beginning to look for consolidated solutions as cost pressures mount. Another trend to watch is that sell side firms are rationalizing their services, and shutting down single-dealers systems on buy side firms that are trading less and have fewer commission dollars. At the same time, buy side firms are paring their broker lists which will result in saving money by not having to support dedicated technology platforms. If this trend escalates, then this may create opportunities for EMS vendors and integrated OEMS providers to help institutions consolidate their systems.
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