Funds Embrace Execution Management: Asset Managers Seek Speed, Control
November 5, 2007
LAS VEGAS-As trading technology continues to improve in terms of speed, efficiency and control, asset managers are constantly clamoring for the newest software applications that can provide real-time market data and provide best execution as quickly as possible.
They are now finding powerful trading software in execution management systems (EMS), applied on top of traditional order management systems (OMS). EMS software incorporates trading blotters with real-time market data and a layer of trading analysis that offers algorithms, predictive technology and performance measurement. EMS systems also connect traders to exchanges, brokers and electronic crossing networks, and some can even handle derivatives and multiple asset classes.
"The thing I am hearing the most from traders is I need things quicker and faster,'" said Joe Piotrowski, vice president and manager of investment systems development for MFS Investment Management, addressing The National Investment Company Service Association's Technology Summit 2007 here late last month.
In the early 1990s, OMS software replaced paper blotter operations and was chiefly concerned with such back-office functions as documentation of trading activity and accounting, although some programs also handled portfolio modeling and rebalancing. As trades grew in frequency and complexity, asset managers turned to EMS systems.
Jeremy Freeman, senior manager of investment technology for Dimensional Fund Advisors, compared EMS programs to a motorcycle that can zip in and out of traffic, and OMS programs to a less-flexible but better-equipped Chevy Suburban.
"The challenge is picking the right tool to use at the right time," Freeman said.
Freeman emphasized the importance of flexibility and said that no single vendor or system will work for everyone.
EMS programs are popular because they are nimble and can react quickly to the market, agreed Mark Volker, senior vice president of global strategy and services for SunGard Transaction Network.
Depending on its trading complexity, a successful firm probably needs a combination of OMS and EMS programs, but not all firms have or need both an OMS and an EMS.
Mutual fund and hedge fund companies that have heavy compliance requirements and that trade with high frequency and complexity would benefit from both systems.
Piotrowski said EMS programs have an advantage over their OMS predecessors by allowing greater access to capital and development resources, but advised that they also come with increased risk and should be used judiciously.
He said a lot of EMS products have very similar features, but some products are better than others.
Volker said some of the best EMS programs are Goldman Sachs' RediPlus, Citigroup's Lava Trading and offerings from Nexa-InfoReach, FlexTrade Systems and Portware.
Spiros Giannaros, vice president of sales in the Americas for Charles River Development, said it can be a struggle to distinguish between the more than 35 different algorithm providers.
"We're almost drowning in this stuff," Piotrowski concurred. Chief information officers should be careful not to get into the "week-before rush," where they see something the week before and need to have it now, he said. A better approach is to take the time to find the best-suited program for their needs, he said.
"Traders should ask themselves, Do I need an EMS and what level of sophistication do I need?'" Giannaros said. "People tend to gravitate toward things they understand."
Differences between the two systems have been blurry for years as traditional OMS vendors like Charles River have begun to incorporate core EMS capabilities, like real-time market data and trading execution, into OMS software.
An ideal system would have a symbiotic, single-user interface that allows a trader to have more control over buy-side and sell-side operations without the confusion of multiple applications and conflicting data.
Cutting-edge traders and asset managers will need the ability to modify trading dynamically throughout the day, Piotrowski said, and firms that don't keep up won't survive.
"Anybody who's [using] OMS only, they're going to be gone in a few years," Piotrowski said.
While implementing new products can be a costly, never-ending cycle for asset managers, he said, there will always be competitors who try to stay in the lead through the use of such cutting-edge technology as EMS.
"You have to ask yourself, are you okay with mediocrity, or do you strive for alpha?" Piotrowski said.
Building a platform from scratch is a huge, long-term investment, he added, and most firms will find it easier and more cost-efficient to purchase OMS and EMS technology from a provider.
However, there is a danger in continually adding more complex technology because it can become overwhelming and may be impossible to go back and unwind the mess, Volker said.
"People want to have something that is special and unique," he said, "but you have to consider the human challenge: Not everybody adapts to new technology quickly."
Volker said it is important to keep employees and operations up-to-date in the latest technology. "Ultimately this will drive greater efficiency," he said.
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