Funds to Increase Trading Investments: Spending to Reach $757 Million by 2010: Celent
October 9, 2006
Total global spending by asset managers on trading systems will grow 19% over the next four years, from $634 million this year to $757 million by 2010, according to a report, "Trends in Asset Management Trading Technology," by Celent of Boston.
In particular, execution management system (EMS) software, which has been available since the late 1990s, is becoming more sophisticated, packing in more tools and options, according to Celent. An EMS connects traders to exchanges, brokers and electronic crossing networks. Often, it includes a layer of trading analysis, including such features as algorithms, market data and predictive analysis.
Vendors, including those from overseas, have continued to launch new, enhanced EMS platforms, giving asset managers more choices and greater autonomy, according to Celent.
As a result, according to Celent, vendors of order management systems (OMS), have begun to partner with EMS providers, or to build their own systems. "Over the last year or so, much attention has been turned to the EMS," the Celent report said. "It stands to reason that the OMS community will look to acquire, partner or develop EMS capability."
Available for about 15 years, an OMS places shares in line for trading and principally focuses on back-office functions, such as compliance, portfolio accounting and portfolio modeling.
But increasingly, Celent found, these systems are also offering trade connectivity and analytics, such as performance measurement and risk analytics. Some vendors are also making their systems capable of handling derivatives and multiple asset classes.
Over the next three to five years through proprietary development and acquisitions, according to Celent, trading technology vendors will begin to offer single, all-powerful trading systems. "Clients will have access to full front-to-back portfolio systems that benefit from each technology category-comprehensive accounting/management, derivative handling, advanced risk analytics, and, of course, sophisticated front office trading," Celent predicts.
However, all experts do not agree on this point.
"OMS and EMS are fundamentally different and serve different purposes. They will not and should not be integrated," said Gavin Little-Gill, research area director with TowerGroup of Needham, Mass.
Regardless of whether OMS and EMS are integrated, however, experts foresee significant growth of both to continue. TowerGroup estimates spending on OMS platforms in the U.S. will grow 11.5% between this year and 2010, Little-Gill said. International growth is expected to be 17%, he said. It is harder to quantify money spent on EMS, as these costs are bundled into trading, he said.
At the same time, over the next four years, new sales to firms that never had a trading system will slow as the traditional market's midsize sector begins its market saturation, said Denise Valentine, analyst and author of the report.
"More and more, the buy side is taking control of the execution-trading process," said Jeromee Johnson, a senior analyst and consultant with TABB Group, a Westborough, Mass.-based research firm.
Depending on a firm's trading style, not all firms have an EMS and OMS or need both, experts said. Less complex fund companies or firms with just one prime broker that do not have many compliance requirements, typically have an EMS. Pensions, for example, which do not serve a large client base, as mutual funds do, might rely just on an EMS.
Asset managers that have heavy compliance requirements, such as running mutual fund money, would benefit from an OMS. Most of the OMS platforms provide a wizard tool for clients to customize compliance rules. Such pre-trade compliance tools use business rules to automate monitoring and adhere to client restrictions, investment strategy guidelines, legal policy and restrictions.
The majority of asset management firms purchase OMS and EMS technology, rather than build their own platforms. "Firms that build a platform from scratch have a huge, long-term investment," Johnson said. The cost of an EMS platform from a vendor will range from $180,000 to $300,000, whereas an OMS platform costs slightly more, $200,000 to $450,000. Complex installations with multiple desks and geographies will cost $1 million or more. Many firms may opt to get their platforms through their broker/dealer at either no cost or at a low cost and repay the broker through trading commissions.
Partnerships and acquisitions of the software market will continue, experts said. The Bank of New York, for example, recently partnered with Eze Castle Software to create BNY ConvergEx Group. The new company pairs Bank of New York's trade execution, commission management and independent research with Eze Castle's trade order management. ITG's acquisition of Macgregor and Lehman Brothers' acquisition of RealTick are other examples.
The newly merged and enhanced OMS and EMS platforms have required traders to acquire new skills, making their job more mathematical and analytical, and requiring them to manage multiple tools and screens, Valentine noted.
"The expanding skill set is indicative of greater buy-side control and more sophisticated trading strategies," the Celent report said.
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