Today’s global trading landscape is vastly different than it was twenty years ago. Structural, economic and regulatory forces, combined with major advancements in trading technology, have ushered in a new era of automated trading. In the United States and Europe, numerous electronic market centers – exchanges, alternative trading systems (ATSs), electronic communication networks (ECNs), and crossing networks – compete for client order flow, offering superior execution speeds, reduced market impact, anonymity, or a combination of the three. New regulations in the US (RegNMS) and Europe (MiFID) have hastened the pace of structural and technological change. As for Asia and other emerging markets, they are not far behind.
At the same time, all market participants – buy-side firms in particular – are under increased pressure to reduce trading costs and rationalize their IT budgets. This is not a new trend. While the recent economic downturn is partly to blame, the goal of bringing increased efficiencies to the trading desk predates the global credit crisis. For firms in all global markets, the challenge is twofold: deploy advanced trading technology that will allow you to navigate – and exploit – today’s complex marketplace, but do so with an eye towards long term value and scalability.
New requirements for a complex market
What constitutes “advanced trading technology,” and what do firms really need to compete effectively in today’s market? To answer that question, consider the challenges posed by today’s market:
- Access to fragmented liquidity.
Firms today face an increasingly electronic global marketplace, and one that offers a wide choice of execution destinations. However, with increased choice comes increased responsibility for execution quality. In such an environment it is incumbent on market participants to take greater control of their order flow. From a trading standpoint, this means the ability to access all available sources of liquidity – including broker execution algorithms, crossing networks, exchanges, ECN’s and other pools of non-displayed liquidity – from a single trading environment.
- Advanced trading tools and analytics.
Given the complexity of the market, traders must have access to integrated toolsets with which they can make informed decisions. Pre-trade transaction cost analysis (TCA), real-time benchmarking and performance measurement, portfolio-level analytics and post-trade TCA – all of these help traders to efficiently gauge trading costs and route orders accordingly. Consolidating and integrating these toolsets into the trading process is critical. Not only does this drive efficiency, it allows for the analysis of orders at any point during the trade workflow cycle, helping firms gauge traders’ decision making processes (and overall performance).
For many firms,the recent spike in volatility has been a painful experience. Soaring trade volumes and related message traffic have crippled legacy trading systems. Unfortunately, these kinds of volumes are fast becoming the rule, not the exception. Technology that can withstand this kind of message traffic is no longer a luxury, but an absolute necessity.
- True multi-asset support.
The ability to trade multiple assets on a single platform offers numerous advantages to firms today. First, connecting data feeds and workflow applications to a single platform reduces integration costs and operational overhead. Second, multi asset systems can support advanced strategies such as auto hedging and multi-asset arbitrage, both of which are becoming increasingly popular.
- Flexibility and ease of integration.
Given the web of interconnected workflow applications, data feeds, and other third party and proprietary systems that firms have deployed, having a system that can easily interface with the rest of a firm’s technology infrastructure is another key requirement. The alternative – closed systems based on rigid technology architectures and proprietary languages – are difficult and prohibitively expensive to deploy. While the short term costs associated with deploying closed systems are considerable, the long-term costs can be enormous. The more difficult an application is to integrate, the harder it will be to upgrade it or customize it in the future. Eventually, such systems become part of a firm legacy infrastructure: out of date and costly to maintain, but too expensive to replace.
Broker EMS – up to the task?
Given this range of requirements, are broker execution management systems (EMS) an adequate solution? After all, compared to order management systems (OMS), which were never designed for trading, broker EMS’ represent a giant leap forward in functionality.
Unfortunately, in today’s market, the answer is no. First and foremost, users of broker-owned EMS’ are tied to the execution strategies and destinations supported by the broker in question. Other dealer strategies, crossing networks or agency broker destinations are off limits. For clients, the alternative is to simply open up another broker’s EMS or order entry portal, yet this “swivel chair” approach introduces a host of workflow inefficiencies and compounds desktop real-estate issues.
Second, broker systems simply cannot handle the increased order flow and market data that accompany periods of high volatility. As ASP systems, the shared technology infrastructure on which these platforms rely is simply inadequate in today’s fast markets.
Yet another problem facing users of broker EMS’ is a lack of flexibility. Beyond basic integration with OMS’, broker EMS’ are essentially closed systems. Users can do very little in the way of customisation, and are at the mercy of brokers for functional upgrades, asset coverage, access to various market destinations, etc.
Finally, the promise of single platform multi-asset trading via broker EMS’ has been left unfulfilled. While many brokers’ EMS’ offer some version of multi-asset trading, more often than not, these additional asset classes are not supported by a common technology infrastructure. As a result, while firms can trade multiple asset classes side by side on broker systems, they cannot be executed in a single environment that would support the adoption of more complex cross asset trading strategies.
In short, the very term EMS is something of a misnomer when it comes to broker trading systems. Traders cannot really manage their executions if they use closed, inflexible trading systems that provide access to only one broker’s suite of algorithms and services
The alternatives: build or buy?
Historically, the limitations of the broker EMS model lead to one of two alternatives: proprietary in-house build or external vendor solution. The former assumed a large, well-funded IT staff that has experience with trading systems development. Given the budget constraints that firms are now facing, this is no longer a safe assumption. Yet even before the current economic crisis, companies were reconsidering a shift away from proprietary technology development. Indeed, more and more companies are realising that the costs associated with developing and maintaining in-house solutions has become too great. Reinventing the wheel is a hard project plan to sell.
The result is that an increasing number of firms are turning to advanced thirdparty EMS’ that can address the full range of challenges posed. Hedge funds and traditional buy-side firms can now quickly and easily deploy a complete, broker neutral execution management solution that provides the kind of flexibility and ease of integration they demand. But the benefits of such a solution are not limited to the buy-side alone. Dealers who want to develop and make available to their clients full-fledged algorithmic trading services no longer have to create a host of proprietary trading systems and workflow applications. Rather, they can deploy a single solution that brings all the required elements of an automated trading system together in one package. It is a system that looks set to become increasingly viable and popular given the current and future trends in the electronic trading community.