Mostly… fixed income and cross product eTrading

For those of you going shopping…. Bobsguide tells us that Fidessa is voted the best sellside OMS for 2008 (overtaking Sungard BRASS). We already knew that Charles River was voted best buyside OMS.

Bobsguide says that TradeTech 2008 Names Charles River IMS Best Buy-Side OMS for Second Consecutive Year … Of course thats equity tradetech .. or at the very least now there isnt a FI one, “primarily-equity” TradeTech, though surely nowadays that’s academic; there is a single cross-asset-class buyside opinion on what the best OMS is?

Having been pretty much bang on with last post about Thomson .. Where next?..  here’s more from John.

Here’s a question that seems to be missed in the current market, where all talk is of OMS, EMS, OEMS and any number of combinations of an OMS and many EMSes. Let’s look at the history of the OMS and it’s younger brother the EMS and see what’s missing….

The modern OMS is generally regarded as being the offspring of Seth Merrin with Merrin Financial. The OMS became popular as a way to provide a system for the front office as a counterpart to the widespread usage of back office systems such as HiPortfolio, Pacer and so on. Originally the OMS simply replaced paper tickets; it provided a replacement for the timestamp and allowed dealers to store execution information based on telephone broker relationships and dealing.

At the same time as the OMS started to come into widespread usage so did FIX. The co-existence of the two is well documented – there is now no serious OMS that does not include FIX connectivity. But this parallel development was the root cause of the problems that are now facing the buy-side OMS world. Simply put, the buy-side OMS vendors had to have FIX in order to get through the RFI/RFP/ITT cycle and the buy-sides IT departments knew that they had to have a convincing story of being able to “do FIX”.Vendors scurried around for a story and often came out with the idea of partnering with a lead client that would be the first to go live with FIX – as the vendor coded up requirements from the buy-side. Alas it was a case of the blind leading the blind. The buy-sides had very little experience or knowledge of FIX and the vendors had even less. After several years of catching up the vendors are still behind the market in terms of functionality and the market is taking great leaps ahead with Algos and dark pools proliferating.

The problems of actually implementing FIX within a buy-side are well known by anyone who has done so – the micro level bugs and issues are compounded by a lack of testing infrastructure at the vendor and a lack of understanding of the workflows associated with electronic trading. So what happens in the larger buy-side? The course that many large buy-sides are taking is to buy an EMS and hope to remove the connectivity piece from the OMS – rather than put right the issues, give the problem to another vendor (or part of the same vendor). Let’s back track here a little. What is an “OMS”? Generally it’s actually three functional pieces and a shared data layer sitting upon a common database or real-time platform.Portfolio modelling / rebalancing / order generation – used by the Fund Manager Compliance – used by Fund Manager to ensure orders are compliant Order management – used by the dealer to keep track of orders sent to brokers by FIX/telephone/spreadsheet

Aite Group report says that multi-asset portfolio systems — those with the ability to process all types of assets including non-listed exotic instruments — are now attracting greater interest from buyers, as investment managers and particularly hedge funds, seek derivative product capabilities in line with their increasingly diversified strategies

 “Even if buy-side firms are not currently engaged in a high volume of over-the-counter trading, they are aware that down the road, a change may take hold,” said Denise Valentine, senior analyst at Boston-based Aite. “To that end, buy-side firms are querying technology vendors on their solutions’ ability to process these instruments today and in the future.”

Trader magazine looks at the fidessa/latentzero tie-up  here

Why do we in the fixed income space care?

Latentzero hooked up with fidessa because they needed a datacentre, a hosted offering, and a decent FIX connectivity hub – all of which fidessa have in spades. Fidessa see latentzero as a way to break out of their existing shape; a great presence among the UK equity market participants, but not so hot in Europe (kept at bay by GL) and even less of a footprint in the US.

Of course latentzero taking over more desktops pays dividends to fidessa in terms of getting their fidessa nuts and bolts onto the punters desktop….  and that’s where Reuters-Thomson and Bloomberg really need to watch out. Once latentzero-fidessa are on your desktop, why are you going to pay to get your market data through one of the current providers and also have to pay you tech guys to pipe that data into your desktop?

Yes were not talking about swaps or fixed income right now, but firms making big decisions about global licenses are surely more likely to side with a solution that on the face of it provides an absolutely nailed and integrated system for at least one product area (equity) and at least “talks the talk” of other products, especially if decent-name dealers are offering point to point distribution in those products in the (even if marketing speak) forseeable future….  Should we expect this to be adopted in spades if point to point means we are not so constrained by gui too (not transaction building blocks but breaks out of the existing constraints?)… What’s the alternative? Deploy a fragmented fixed income style environment of apps here and there and expensive desk jockeys rekeying things between them rather than really adding value somewhere else in transaction terms?

My unscientifically conducted “survey” reveals expectations are for latentzero to become the dominant part of the merged company over the next 18 months.    How are Bloomberg and Reuters-Thomson planning to fight this long term to stay on your desktop?

Asset managers, investment banks and broker-dealers are losing revenue because their front office systems cannot handle the complexity of modern trading strategies, according to a TABB research report quoted in EFN. This says that the traditional structure of trading companies, with silos dedicated to particular instruments, “is slowly and surely disappearing” as the number of systems used diminishes.

Sellside companies are “beginning the process of aligning their businesses to reflect more accurately the needs of their biggest customers”, but the challenge is keeping pace with change. The report says the buyside is “approaching investing in a whole new way”, specifically that “They are using complicated, inter-related plans that expose them to securities outside of their traditional comfort zone, exploiting arbitrage opportunities across capital structures and achieving investment goals by using the most efficient financial instrument – or combination of instruments – to achieve the desired exposure, risk and reward.”

For this, desktop integration is the buyside traders’ top concern, ranking over liquidity or trading errors, according to Tabb, with the report saying it is the responsibility of the head trader to “balance all the desk requirements across the various silos” – relatively easy for smaller firms but becoming geometrically complicated for large sell side trading desks with multiple locations, multiple asset classes and multiple entrenched interests.

When the Pilot Stocks Phase of Reg NMS goes into effect the entire securities industry exchanges, brokers and market makers must be capable of routing orders for the 250 pilot stocks to most exchanges and ECNs under Reg NMS’ best price requirements.

Rather than build the necessary connectivity to all 10 required equity market destinations, many firms are turning to third-party vendors – and so far, the vast majority of exchanges have chosen Order Execution Services (OES) and Lava Trading (part of Citi Electronic Trading Solutions) to provide the connectivity and smart-order routing to sweep the various destinations.

With Lava believed to be using OES to reach some of the destinations, and the EMS vendors also using them for the ‘market connectivity’ they offer too, WSJ poses the question of whether too many eggs are now in these two baskets – OES and Lava…

As electronic trading causes a surge in market data volumes, and buy-side traders seek connectivity to liquidity pools, algorithms and exchange venues that are moving into multiple asset classes, there’s a rising demand on the buy side for execution management systems (EMSs) – says WSJ in an article about this years SIFMA conference

Many order management systems (OMSs) provide access to broker algorithms and operate order routing networks, but they are not as fast as the EMSs, industry sources say. While hedge funds that focus on fast executions across multiple destinations can make do with just an EMS, traditional asset managers still need the OMS, which they use to document trades, rebalance portfolios and handle everything from pre-trade compliance to post-trade allocations.

So the technology providers are pitching integrated global OMS/EMS solutions, taking various approaches to achieving OMS and EMS functionality in a single platform, including acquiring an EMS and merging the two systems, building an EMS on top of an OMS, or building an interface that can connect with third-party OMSs.

And the vendors are placing their bets what the buy side really want; a single OMS/EMS (Eze Castle-ConvergEx, Fidessa LatentZero, ITG Macgregor) or the flexibility to integrate with their favorite EMS (Linedata)

While equity/exchange trading getting its act together in terms of a single buyside entry point to ‘the market’ (regardless of how achieved – above), the status-quo for fixed income remains to use separate application per venue (tradeweb, marketaxess, rtfi, bloomberg, and so on)????

So Goldman Sachs has extended the functionality of its REDIPlus multi-broker execution management system (EMS) in Europe, so users in the region can now route orders to other brokers’ algorithms via their platform.  Joining the dots between this and my previous post on EMS for fixed income , when should we expect to see an EMS standing up and being counted as a customer-side desktop for Fixed Income?  

Of course this isn’t just dealers who can do this. While it seems initially a less likely outcome, how about one of the FI ECNs having the courage to acknowledge the competition in particular product sets where they don’t excel, and do the plumbing to let their GUI offer their customers a route into another venues liquidity…