With the buy side taking advantage of new, alternative pools of liquidity such as ECNs and crossing networks, order management system (OMS) vendors such as Decalog and the MacGregor Group are moving to create "intelligent" links to these alternative trading systems that afford buy-side traders more control over their trading strategy.
According to Dushyant Sharawat, a TowerGroup consultant, these links are an inevitability if the buy side is to maximize the use of the ATSes.
"This is the second stage, what we call the second level of connectivity that these vendors are building," explains Sharawat. "Large buy-side firms, the traders, are saying it's not just enough to send 10% of my trades to be crossed at Posit. They are asking, how do I send those trades down in an automated fashion, and incorporate that decision into my overall trading strategy?"
Sharawat says he believes that Decalog and MacGregor are the only two vendors working currently on such communication mechanisms, but he expects that others will do so soon if they plan to compete for the top-tier portfolio and fund managers. Representatives from Decalog and MacGregor did not return phone calls by press time.
As an example of the power of such links, Sharawat told a story of a money manager that needs to unload a million shares of GE. Typically, the buy-side trader will transmit a sell order of 10%, or 10,000 shares, to a crossing network. If those shares are picked up by another counterparty, the trader will then have to decide whether to send down another 5% or so of the shares to be sold. "These new systems will tell the trader that it makes sense to send out 5% at the next crossing time," he explains. "This is the type of intelligence that MacGregor is building into its product, one that will help the trader come up with a trading strategy rather than just sending orders down to the ECNs."
These new links come at just the right time, when more and more buy side institutions have warmed up to the idea of ECNs, thereby wresting control of their investment decisions away from the broker/dealer community. No longer dependent on 15 to 20 brokers, money managers can shop around for better prices, but this freedom, as it always does, requires more responsibility. The buy-side trader, in essence, is required to "walk a trade through" far more than ever before, Sharawat confesses.
He believes that these new links will make it to market fairly soon because of the increased demand for them, citing the already growing rift between the have's and the have-not's in the order management vendor field.
"There is a distinct difference between those firms that already have links to ECNs versus other firms that are working to create them, like FMC (Financial Models Corp.)," Sharawat says. "Some of the ones that have limited links, don't need extensive ones, like Advent (Software) because they reach out to more mid-tier to small size firms that don't require it. But, if you're targeting the larger firms, it is imperative."