With the evolution of order-management technology and the proliferation of connectivity to electronic markets, the role of the buy-side trader is changing. "While buy-side traders have always been involved in the investment process, order management systems (OMSs) have empowered them to have more discretion and control over their orders," says Roger Petrin, senior principal and manager of global trading at State Street Global Advisors (SSgA), based in Boston. "It's been coupled with direct market access and algorithmic trading - we don't depend on the broker as much," he says. "The OMS adds a new dimension of independence to the buy-side trader."
No longer beholden to brokers and sell-side traders, buy-side traders are executing their own orders from the desktop, utilizing more-sophisticated strategies. "It's the hub of your workflow," says Ben Sylvester, managing director at Babson Capital Management, of the buy-side OMS. The Boston-based money management firm, which uses the Macgregor Predator system, has its positions, compliance tools, modeling tools, order routing to brokers via FIX and access to algorithms connected through the OMS trading blotter.
Ten years ago, the buy-side trader's role was as an intermediary, taking orders from the portfolio manager and ensuring that those orders were executed in the market by brokers, recalls Daniel Houlihan, managing director at Citisoft, an investment management consultant in Boston. Today, he adds, "The buy-side trader has become much more of an enabler of sophisticated strategies through the use of complex technology" integrated into the OMS.
"It's truly an information age, and it makes the trader that much more important," says Bob Gauvain, senior vice president and director of U.S. trading for the $47.2 billion Pioneer Investments in Boston. Pioneer's head trader has access to a number of ECN aggregators and direct market access tools from the Charles River Development OMS, which it uses on the equity side. In May, the money manager planned to install a new version of the Charles River OMS that has a huge fixed-income component, Gauvain says.
"I was hesitant to add any more functionality," notes Gauvain. "We have Pipeline; we have Harborside+; we have Credit Suisse First Boston's AES [Advanced Execution Services]; we have Liquidnet," he says, ticking off a number of alternative trading systems for block trading and algorithmic tools that have been integrated into the OMS.
The transformation of the buy side began in the early '90s, when buy- and sell-side firms began adopting the Financial Information Exchange (FIX) protocol - a language that allows traders to route orders through OMSs, such as those from Charles River, Macgregor, Linedata Services and Eze Castle Software. The adoption of FIX enabled the buy side to send orders electronically to brokers without having a conversation because the indications of interest, or IOIs - the prices at which brokers are willing to buy or sell stocks - are being matched against the orders they have on their trading blotter.
Today, that transformation is evolving further. Five years ago, "70 percent of all orders were outsourced to the sell side," observes Seth Merrin, CEO of Liquidnet, an alternative trading system for matching institutional block trades. "That was the only way you could get orders done."
Now, that ratio has been reversed, contends Merrin. The sell side currently receives just 30 percent of those orders and 70 percent are worked by the buy side directly in the market with algorithmic tools and DMA tools.
This shift in the relationship between the buy and sell sides has put pressure on the OMS vendors to beef up their products' trading functionality. "The OMS becomes the cockpit for the traders so they can move in and out of markets quickly," says Tom Driscoll, a vice president at Charles River Development in Boston.
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