Many technology providers have tried – some more successfully than others – to integrate their trader-focused execution management system (EMS) with the portfolio manager-focused order management system (OMS).
Still, the question has been raised by the market: "Do you really need this integration to tackle the new, more challenging financial markets?"
While I cannot speak for all market participants, I spend a good deal talking to the buy side, tracking market developments, and working with the technologies that support both. To me the answer is a clear "Yes."
It would be fair to ask why the buy side should adopt a comprehensive front-office platform that includes an integrated OMS and EMS. It would also be fair to ask what the buy side could expect from this platform in the way of benefits.
There are four major reasons why the buy side needs to adopt this comprehensive solution. First, the hunt for alpha, the so-called active return on an investment, is extremely challenging in a depressed-return environment, such as the one that we now face. Never before has the pursuit of returns been as tricky, complex and uncertain than what we are seeing in the current market. In addition, hedge funds are seeing historically low returns, and absolute returns on most instruments are far below their highs.
This more challenging market environment is changing the way buy-side firms are generating alpha. In prior years, alpha was largely the product of the portfolio manager. Now, central bank decisions are moving markets in ways that are disconnected from the fundamentals of the underlying securities, creating opportunities and obligations for traders to generate returns.
As alpha generation has evolved into a partnership between trader and portfolio manager, we have also seen a revolution in the use of algorithms, giving traders an increased ability to trade discretely in the marketplace, along with the increased segmentation of liquidity destinations.
The partnership between trader and portfolio manager requires good coordination across the investment tools that they use to generate returns. Neither function should be out of synch with the other, and neither can afford to overlook any efficiencies or new tools that can be used to generate alpha.
Secondly, the evolution of best execution. When best execution rules were first introduced, they were relatively limited in terms of scope and content, focusing mainly on equities. Over the past few years, they have gradually expanded. Today, MIFID II and a host of other regulatory packages are creating new opportunities and obligations around best execution in new asset classes. Right now, foreign exchange is getting a lot of attention because of a number of recent investor lawsuits. Fixed income will be the next asset class to come under the best execution microscope, followed by a cluster of new over-the-counter (OTC) derivatives. From a technological standpoint, there is simply no practical way to apply the best execution across the investment workflow without integrating the processes and calculations of OMS and EMS.
Thirdly, the "electronification" of OTC asset classes. On top of best execution, there is a set of new regulations emerging – Dodd-Frank in the United States, and other similar regulatory packages in Europe, Australia, and elsewhere – which will present new challenges around OTC asset classes migrating to exchange-traded models.
This migration could be called an "electronification" because many will switch from phone-based to screen-based trading. However, you could also characterize this as a "liquidificiation" as well, since the additional transparency and efficiency in trading these asset types will create more liquidity, as well.
To be sure, there is a good deal of complexity in the pricing and margining of these new asset types. In addition, there will be significant challenges around collateral management and coordination of payments and receipts. Again, from a technology point of view, these challenges can only be answered by the merger of the functionality of the OMS and EMS.
Fourth, the Need to Control Costs and Create Efficiencies. Asset managers have faced, and will continue to face, intermediation and margin compression, which will put constraints on resources. Already, the buy side is looking for ways to reduce the expense of their information technology. The buy side is now taking a hard look at consulting costs and the cost of integrating and supporting multiple systems. Combined systems, especially those supported by cloud computing, help the buy side avoid these costs, by achieving simplicity of deployment, lower headcount, and reduced overhead.
The Key Benefits That Await
These are all the reasons why the buy side should switch to a combined system, but there are actually a number of key benefits that this combined system will generate for these businesses, as well: For starters, high consulting fees will be a distant memory. Cloud-based order management systems offer a greatly improved implementation experience and rapid deployment. They also help the buy side avoid heavy consulting costs and extreme complexity of interfacing sometimes very different platforms. Cloud-based technology also supports self-service portals, which will eliminate the high implementation costs of deployed systems. Now, 90 percent of a deployed system's eventual price tag takes the form of consulting fees. Soon, the cloud will make these fees a memory for the buy side.
The next benefit is better insights to the right people, and without the wait. One of the main benefits of an integrated OMS and EMS is the rebalancing and optimization of the workflow between the portfolio manager and the trader. Both roles will finally get the vital information that they need – when they need it, in the right format. It will also give traders and portfolio managers the power to use self-service portals to optimize the tools to accommodate their personal preferences and processes, allowing both to do their best work.
This new paradigm will offer an improved views into risk. Once the integration is complete, buy-side risk functions and risk controls will be more developed and efficient than it is today. The coordination between the EMS and OMS systems simplifies processes that are difficult to do today with disparate systems, such as providing credit analysis over time. (Because the EMS only looks at current trading, while the OMS is historical, it's difficult to merge the two views if the systems are separate.) In the same manner, the integration of the two systems would allow you to integrate the separate risk model on the EMS-side and the compliance side at the firm-wide level, not just at the level of single system. Each participant in the risk analysis process will be equipped with the systems he needs to control his activity.
There will also be new services, such as TCA and beyond. A string of new services is set to emerge that will make the lives of asset managers vastly easier. A comprehensive front-office system can provide trader-optimized graphical monitoring of executions for large orders, particularly when algorithms are used. This tool can help the buy side justify best execution – extremely important in the current, litigious environment – or simply take advantage of new alpha generation opportunities.
Finally, a network of all the fully integrated systems could constitute a new, extremely powerful infrastructure that will dwarf anything that exists today in terms of liquidity capture management and delivery, price accuracy, and number of participants. It will take a resource-rich, truly independent, and innovative provider to leverage the extreme power of the buy-side traders to organize them as a massively efficient trading network. Once complete, this network will have the potential to revolutionize buy-side trading.
Philippe Buhannic is CEO and co-founder of TradingScreen, and has more than 30 years in the financial services industry. Before this, he served as a managing director at Credit Suisse First Boston and as chairman and CEO of Fimat Futures USA, the subsidiary of French investment bank Societe General (SocGen). Philippe Buhannic, CEO and co-founder of TradingScreen, is an industry pioneer. Buhannic has stayed on the forefront of global markets and financial technology for more than 30 years, in a career that has spanned executive management, technical, and marketing experience in ... View Full Bio