Thirty percent of buy side institutions are actively exploring a replacement or an evaluation of their order management/execution management (OEMS) systems vendor, according to a study by Greenwich Associates.
Faced with new regulations changing the market structure in derivatives and new compliance demands across asset classes, buy side institutions are assessing whether their systems can keep pace with the changes, according to the Greenwich study.
The study is based on survey of 486 head traders around the world asking them about staffing, budgets, and technology usage on their trading desks.
Specifically, 35 percent of investment managers and 29 percent of hedge funds and 27 percent of banks said they were considering a replacement or an evaluation of their OMS/EMS vendor.
“The two things that stick out the most are that almost a third of the people said they are looking at switching, “ said Kevin McPartland, director of market structure research at Greenwich Associates in Stamford, Conn. “On the OMS side, that’s a lot for an industry so small and so mature. On the EMS side there are a lot of competitors and it’s hard to differentiate one system from another," he said.
Still, certain OMS/EMS systems are widely used and rated highly by traders. Head traders rated Bloomberg as the most used EMS and most used OMS provider. Eze Software Group and Instinet, which are known for equities and equity derivatives, tied for highest overall EMS quality. BlackRock, whose Aladdin system handles complex fixed income instrument and risk analytics, received highest overall OMS quality, while Bloomberg and Charles River tied for the same spot.
However, it’s not so surprising that firms are conducting evaluations or contemplating a system switch since so much change is going on in asset classes right now, including the economic talk of the Great Rotation, said McPartland. All of this means, buy side institutions are looking for a different set of news tools for dealing with the market as it is today, as opposed to five or six years ago before the crisis, said McPartland. They are also looking to cut expenses, get the best price and new ways to seek liquidity, he said.
Fixed Income Trading Desks Seek System Changes
Fixed-income trading desks are undergoing the most radical change currently, so it “comes as little surprise that buy-side investors in this asset class are more likely” to consider making improvements to existing systems and spending more on technology, states the report.
In fixed income, changes are encompassing derivatives and the cash markets, including the corporate bond market, the Treasury market and swaps market, said McPartland. In corporate bonds, dealers are not providers of liquidity anymore and there are lots of new systems coming online, noted McPartland. “People are also looking harder at TCA [transaction cost analysis] and Treasury markets are becoming more electronic, while Fed tapering is the macro economic component,” said McPartland. Platforms are working to make the changes needed for fixed income, but it’s also an opportunity to use something else out there, he said.
Adapting to the changes in fixed income will require an increase in tech spend. In fact, 39 percent of fixed income desks plan to look into new systems in 2014. Budgets for fixed income trading desks were up 38 percent from 2012 to 2013, while foreign exchange was up 29 percent and equity 26 percent.
“Fixed-income trading desks will need new access to SEFs, clearinghouses, additional market data sources, improved pre and=post trade analytics and new trading tools,” stated the report noting that system changes or switches in that area will carry a cost.
Demand for OEMS but Disconnect Exists
The other surprising finding is around the discussion of a single OEMS platform, said McPartland in the interview. “Lots of the firms we spoke with thought an integrated OEMS would be great, but no one has one,” said McPartland. Yet, McPartland and other research firms have been writing about the OEMS market for five years. “Is it onerous to pull out an OMS and replace it with an EMS?” asks McPartland.
Two-thirds of the institutions participating in the study say they would prefer to use an integrated OEMS, including three quarters of hedge funds. Stoking the interest in a combined OMS/EMS platform is the passage of new derivatives rules in the United States and Europe and the increasing integration of asset classes and investment strategies, according to the report. Despite the clear demand, only 11 percent of institutions participating in Greenwich’s research say they employ an OEMS, even though there are several offerings in the market and many buy-side firms use an OMS and EMS from the same provider. The report speculates that traders are reluctant to take on an OEMS due to the potentially difficult technology overhaul, or they are shying away from OEMS because they think the functionality of OMS, EMS or both is subpar to the standalone system.
But the report predicts that a transition from separate EMS and OMS platforms to integrated systems will play out over a long time horizon, and that new regulations will accelerate the process.
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