Buy-side firms are ramping up spending on order and execution management systems, moving to integrate the two in a bid to streamline desktops while ultimately lowering risk, according to a new report by Tabb Group.
Faced with investors who are more savvy and inquisitive about the trading process in the aftermath of the global financial crisis, buy-side shops are looking to develop technology and processes that can better document the lifecycle of a trade.
The report, entitled “The Buy-Side OMS and EMS: Integration, Expansion, and Consolidation,” reveals that the integration of OMS and EMS functionality is happening on a large scale as firms aim to get a tighter grip on the rising amount of data and executions they have to manage in the wake of quicker markets and shrinking trade sizes.
“The more streamlined and automated the process, the less risk they have,” Tabb Group analyst and author of the report Kevin McPartland, says. “The technology clearly exists and for the most part can be bought off the shelf. So there’s little reason or excuse for the buy-side not to automate their equity end-to-end process.”
The report projects spending on OMS and EMS technology will rise by 5 percent and 1 percent, respectively, over the next two years on a compound annual growth rate basis. Nearly half of the firms surveyed currently receive their OMS and EMS platforms at no direct cost on the strength of their relationships with brokers.
However the research notes that with brokers increasingly opting for a more cost-effective approach to order-flow acquisition, their ability to give buy-side customers free trading platforms will fall over the next three to five years.
In fact, that trend appears to already be underway, with the number of buy-side shops opting for broker-funded EMS platforms down 3 percent from 2008 levels as firms increasingly choose to access preferred brokers through a single platform.
“Over the last decade or so we’ve seen automated solutions pop up for nearly every facet of financial services, including over-the-counter derivatives and other markets that are thought of as more manual,” McPartland says. “Now that those individual processes are in place, it’s coming down to more of an integration and a process management concern.”
Although broker-owned platforms are still the most widely used, the buy-side is using fewer EMS’s these days as a means to make execution more efficient. According to Tabb Group, on average buy-side desktops will rely on 1.6 EMS’s in 2010, down from 3.4 in 2008.
“There’s really no reason to have multiple EMS’s on your desk anymore when you can get access to all of your favorite brokers through a single platform whether that system is broker-provided or provided by a third party,” McPartland adds.
The report also predicts that spending on analytics, algorithms, and risk management will slightly improve over the next few years. Meanwhile multi-asset technology and geographical access will become more commonplace as platforms that once focused on a single market or asset class expand.
“People have started to look ahead and realize they can’t just play defense anymore,” McPartland says. “With such a focus on reducing risk and having IT dollars dedicated to that now, this is the time to set the groundwork for the next several years of growth.”
The report is based on interviews with 118 U.S.-based buy-side traders, split nearly 50 percent between hedge funds and traditional asset managers.
As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio