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The TRADE Magazine

Wishing and hoping and thinking and praying

Brokers and vendors seem to have a clear idea of how the buy-side can best cope with desktop application clutter. Are buy-side trading desks on top of the challenge and do they share the confidence of their suppliers? (Richard Schwartz)

Rare indeed is the cry of the buy-side trader bemoaning the lack of electronic trading and decision support tools on offer from brokers and third-party vendors. In the last issue of The TRADE, we noted that the applications landing on buyside traders' desktops over the past few years had in fact created a workflow problem for many: how to make use of the available functionality in a coherent and effective fashion, where value can be seen to be added.

Not that automation of the trading function is resented: a study of buyside traders conducted in September by Liquidnet and Greenwich Associates shows that on the whole they are coping well with automation (see News). A majority of traders in the survey sample, across all geographical regions, maintained that they were enjoying the business as much now as they were three to five years ago. When asked what changes they appreciated least over that period, 50% of Canadian respondents cited ‘too many electronics and a lack of personal interaction." Others, however, appeared more exercised by the increasing administrative burden and the declining quality of sellside coverage.

Some 44% of respondents said they had three or more trading systems on their desks and this seemed to apply regardless of size of assets under management. The trend towards increased choice in trading systems and techniques seems set to continue. Some 77% of survey respondents either agree or agree strongly that their firm will increase its use of algorithmic trading; 68% expect to increase their use of pre-trade TCA; while 80% anticipate a greater engagement with post-trade TCA. All three will involve more efficient use of technology.

Wish-lists 

Brian Mitchell "EMS allow quick access to a wider range of execution venues and exchanges than current OMS facilitate and also help with MiFID obligations." Brian Mitchell, head of dealing, Baring Asset Management 

These findings are reinforced by a recent research report from Celent on trends in asset management trading technology. The author, Denise Valentine notes the pace of change over the last five years "from automated workflow routines to sophisticated algorithmic trading, from locomotive to bullet train speed,

from phone-savvy traders to electronic trader gurus."

The latest evolution of execution management systems (EMS), she suggests, is reconfiguring traders' desktops, packing in more tools and options. "More choices, with vendor introductions from overseas and new product launches, are still afoot," she comments. "The upside for the asset manager is tremendous since the degree of autonomy is significant and long-awaited," says Valentine, though, she observes, "the downside is multiple systems, a change in required skills on the desk, and a rapidly changing environment in market structures and regulation."

The pace of global spending will nevertheless slow over the next few years, the Celent report predicts. "Prices have declined, and there is some market saturation," it suggests. Vendor consolidation will likely continue along with client consolidation. Celent expects total global spending by asset managers on trading systems to grow from $634 million in 2006 to $757 million by 2010, an average annual growth rate of 4.6%

On the links 

Barry McQuain "Our systems do a good job of alerting us to opportunities or problems – we think of it as exception level reporting." Barry McQuain, chief technology officer and chief risk officer, Lionhart Group 

 Mike Plunkett, president, North America, Instinet, has suggested that the issue for the buy-side is less a problem of mastering individual applications and more one of integrating them into the workflow in a coherent manner. "Almost everyone has a basic understanding of what the technology represents at the front-end," he observed, "but not necessarily in how to blend them together."

The question this begs then is how much of what buy-side traders have available at their fingertips is useful, but not efficiently used, and how much is unnecessary.

The TRADE's own straw poll of buy-side traders has found a yearning for access to dedicated execution tools. Needs obviously vary according to client type. A hedge fund will more often than not be looking for a front-end trading application that provides a gateway to the various marketplaces and data sources it wishes to access.

Hedge funds still differ from traditional money managers in being much more execution-focused. Traditional managers are still more decision-oriented. A long-only manager, possibly less concerned with handson trading in a short timeframe, may be concerned with periodic portfolio rebalancing. In both cases, however, the kind of execution capability not traditionally found in order management systems (OMS) is seen as a must-have.

The distinction, perhaps, is in a respective focus on latency and capacity – a factor also influenced by the professional origins of the trader concerned. As Gail Romano, director of North American operations at LatentZero pointed out in our last issue, traders whose formative experience is on the buy-side are likely to look to their OMS for any required functionality. Traders who learned the ropes on the sell-side expect to have access to dedicated execution tools.

The origins of the OMS are in facilitating the internal order flow within a buyside firm, essentially ensuring that both traders and back office personnel are correctly apprised in a timely manner of the portfolio manager's investment requirements. Out of that, a need developed for OMS to be able to convey and receive execution information, essentially for the broker to act on.With the migration of execution opportunities and skills to buy-side desks, it was only natural that buy-side traders would look in the first instance to their existing systems to provide the requisite information flows.

The TRADE's straw poll found the desire for execution management tools at the top of the buy-side trader wish-list, regardless of the form in which it is provided. Respondents were asked what one piece of technology they would like that they don't have and that would make a measurable impact on their trading efficiency. In virtually all cases, EMS was the answer. "Personally, I don't care where that functionality resides – within the OMS or as a separate application," says Carl James, head of portfolio services at Henderson Global Investors. "EMS tend to be fairly flexible and easy to integrate. What I'd welcome is a broker- neutral application." Henderson's OMS provider is in the process of building that functionality, says James, who looks forward to being able to deploy it by end-2007. He acknowledges that EMS functionality is already made available to buy-side clients by a number of brokers, who offer their own ‘plug and play' EMS. However, he points out, "unless you trade with one broker only, that is not the ideal solution, particularly where you want to link to competing destinations, such as different brokers' algorithmic services."

"We have access to a number of EMS, though our OMS is from a different provider," says Iain MacCormick, dealer, Standard Life Investments. The gap in trading flexibility and market data integration that EMS were designed to exploit is very quickly being filled by the OMS vendors, who are changing their technology to cope, he observes. "It's a very fluid market at the moment with both sets of vendors trying to capture value," he says. "Longer term, I'd expect the OMS versus EMS debate to transform into a ‘heavy' OMS with full integration versus ‘light' OMS decision with polarisation occurring between the large and smaller- sized institutions, including hedge funds."

Yet trading efficiency is not the only driver for EMS adoption. Beyond trading efficiency per se, says Brian Mitchell, head of dealing, Baring Asset Management, "EMS allow quick access to a wider range of execution venues and exchanges than current OMS facilitate and also help with MiFID obligations."

Where EMS does not top the list, other trading decision support scores high. For Fiona Frick, trader at Geneva-based Unigestion, for example, "a good posttrade analysis tool would provide concrete benefit." Looking ahead, one respondent anticipates a growing requirement by end-2007 for aggregated books to counter the fragmentation that will occur with the implementation of MIFID.

Not all respondents to The TRADE's poll are actively shopping for extra functionality. "Our systems do a good job of alerting us to opportunities or problems – we think of it as exception level reporting," says Barry McQuain, chief technology officer and chief risk officer at San Francisco-based Lionhart Group, which essentially uses third-party applications to supplement in-house builds. "Making this concept a part of everything we do – from trading to risk control to operations – is getting a lot of attention from our systems designers and developers lately, and will get more in 2007."

These responses confirm the view of Tom Driscoll, vice president, sales and marketing at Charles River Development, who extends Romano's analysis of the two different notions of the appropriate location for execution functionality within a buy-side shop. On the one hand, he suggests, adding functionality to an OMS is seen by some as a potentially ‘cumbersome' solution. Others see the OMS as the natural home for enhanced execution capability as it obviates the need for integration and avoids potential problems with vendor competition.

Innocent victims 

Carl James
"EMS tend to be fairly flexible and easy to integrate. What I'd welcome is a broker-neutral application." Carl James, head of portfolio services, Henderson Global Investors 

Despite the sense that desktop clutter is a growing problem on the buy-side, it seems that few trading desks at investment management firms have actually been reluctant recipients of sellside largesse. In its straw poll, The TRADE asked buyside dealing desks how many of the trading (and trading support) applications that have arrived on the desktop over the past two years were specifically requested by the team. One trader, who was responsible for building a desk from scratch, noted that while the bulk of the functionality acquired was the result of a specific request, there was nevertheless some support required from and for legacy systems.

Most heads of desk seem to feel that they are in control of such decisions. "All trading applications have been requested by the desk, either as a core fit, or used as an exploratory piece of kit into an area to test out our marginal benefit expectations," says Standard Life's MacCormick, reflecting the majority position. "Within the desk, everyone has a free hand to suggest and sell their ideas to the rest of the team.We're obviously in the best place to assess whether there would be a positive impact from a new application." That said, he adds, "Technology is a key driver for us and we can take inspiration from any source. Clearly, if it will have an impact downstream, our IS can very quickly help us assess integration fit, and impact over the whole process, and bring in other parties if need be."

Lionhart's view is influenced by the in-house resources to which the dealing desk has access. "We have six in-house developers, so we get quite a bit of custom work," says McQuain. "I continue to request riskcontrol- related applications and reports, and am very happy with the results produced by our team."

When asked what they would choose if they could rebuild their desktops from scratch, responses suggested that some heads of desk are putting a positive spin on what they have more out of necessity than enthusiasm. Among the terser responses were, "A much more tradingoriented order management system" and – even more forthrightly – "Liquidnet, Bloomberg and Reuters."

For MacCormick, given such an option, the key would be integration. "We put a lot of effort into ensuring that one application can ‘speak' to another," he comments. "We don't believe that ‘one size fits all', but are aware that a balance needs to be struck between the number of applications and the diminishing returns they provide. Close integration at least provides a platform on which we can slightly alter the flavour of our systems to suit the asset classes and markets we look at – while retaining a clear direction we as a desk wish to move towards in terms of technology."

Mitchell likewise places value on flexible multi-asset trading capability. "I would go for the most up-to-date OMS that covers all asset classes: FX, fixed income, equities and derivatives," he says. "Many OMS profess to do so, but few exhibit the required levels of functionality." He would also insist on the best available FIX functionality and connectivity. "I'd want the FIX engine to be off the latest version: 4.4 or 5.0," he says. "The OMS would also be fully integrated with two or three FIX Hubs such as LSE and NYFIX rather than pointpoint connections." As far as EMS are concerned, says Mitchell, OMS providers should be hooked into various EMS rather than trying to half-heartedly do it themselves." Finally, says Mitchell, they should also obviously include connections not only to individual broker algorithmic services, but also to more neutral vendors.

For McQuain, the dominant applications have, in fact, been built in-house. "At Lionhart, we have an internal system called Safari that handles our order management, risk control, accounting, etc.," he explains. Everyone in the organisation uses the same system, as do some of the firm's brokers, back office, and administrators. "We will be increasing the decision support functionality over the next 12 months," says McQuain. "Rather than monitoring the spread levels ourselves, we will let the computers do this for us – and alert us when things get interesting. Since we are web-based, we can login in from all over the world – securely. This is a must-have, given the global basis of our trading and investing. Overall, I need more screen real estate."

Execution consulting 

Iain MacCormick"If a buyside firm takes on a sellside sponsored application, or any application for that matter, the first issue they should seek to address is integration." Iain MacCormick, dealer, Standard Life Investments 

To help buy-side desks make optimum use of the trading resources available to them, a number of sell-side firms are now offering execution consulting services. There does not appear to be any consensus on the value of such services among potential recipients.

"It depends on the firm and their approach to technology," says MacCormick. The sell-side are used to running many small, integrated applications to fit the different areas of an investment bank, he argues, whereas the buy-side have been weaned on a single system approach to fit over their processes. "If a buyside firm takes on a sell-side sponsored application, or any application for that matter, the first issue they should seek to address is integration. "Mitchell, however, is more welcoming of such initiatives. "I certainly see a value in sell-side execution consulting services," he says. "You can never have too much knowledge on the latest trading tools available and the best ways to maximise returns or at least minimise alpha loss."

Finally, traders were asked which of the various offers they receive on a regular basis they have so far decided they could do without. It is clear that algorithms continue to divide buy-side opinion. While broad algorithmic connectivity was seen by some as essential, others appear to be tiring of individual sell-side promotions. "We're offered too many algorithmic tools," said one respondent bluntly. Another found the approach of individual algo vendors somewhat wearing, since "we tend to prefer to use a consolidator." James, a longtime sceptic of the value of algorithmic strategies to the buy-side, has maintained that position. "I still remain to be convinced about the benefit of our own desk adopting algorithmic trading strategies directly," he comments. "At the moment we still prefer to leave that to our brokers."