Expected further growth in the uptake and importance of execution management systems (EMSs) will sustain the 100-plus vendors and limit consolidation, according to a recent report by US-based capital markets consultancy firm Woodbine Associates.
Sensing no foreseeable decrease in the number of providers, in part due to an expansion of user requirements, Woodbine principal Matt Samelson argues that the EMS is now “essential for virtually all professional trading firms”.
EMS use has soared since buy-side direct market access became established practice during the early 2000s and the market is now worth US$1.5 billion annually. Woodbine estimates a global user base of 12,500 firms deploying EMSs for anything from simple trades on a one-off, direct market access basis, to black-box, high-frequency trading (HFT). The report estimates that the primary users of EMS technology are hedge funds, comprising some 60-75% of the global user base, with asset managers, brokers and banks accounting for nearly all the remainder.
Although the report cites 15-20 well-established providers, it lists more than 100 in total, and emphasises that trading firms should invest the time required to select the EMS that suits their needs. “Cost is not important, but how you are going to use it is,” said Samelson, adding that the number of providers was fully supported by market demand.
EMS selection is tied closely to the user firm's needs and workflow, in terms of asset class, execution trading strategy and geographic reach. “Some firms, such as those specialising in HFT, will take a very customised approach. It's very much based on individual needs and not every solution competes. Each vendor tends to have a value proposition or a way they conduct their business that appeals to the user community,” said Samelson.
Despite the broad range of functionality on offer, the most obvious distinction between EMS providers is between full-service brokers – such as Goldman Sachs, J.P. Morgan and Morgan Stanley – and technology providers and agency brokers, including Bloomberg, Fidessa, ITG, Instinet, SunGard and Orc Software. While brokers often provide EMSs as one of many service offerings, frequently ”bundled' to drive order flow, the report suggests these offerings are more likely to be standardised, whereas vendors offer the greatest variation.
In addition, the report reflects the increasing number of system delivery installations, from locally installed, heavily customised solutions to more standardised ASP offerings that require little to no on-site implementation requirements. “Sometimes users buy their EMS out of the box in order to customise it from scratch,” he says. “There are also modular solutions, whereby users specify which parts they want to use, depending on the activities they need to carry out.”
The report adds that the increasing importance of transaction cost analysis to the buy-side community has led some EMS providers to improve their offerings in this area. It also notes that a few providers are pushing forward with real-time delivery of order information to users, allowing quicker price discovery, while others are concentrating on developing pairs trading tools to accommodate a recent upsurge in this kind of trading activity.
In addition, EMS offerings that can operate across multiple geographies and asset classes are gaining significant market attention as firms attempt to overcome the difficulties caused by a constrained economic climate in developed economies and relatively low trading volumes around much of the globe.
“The market is becoming increasingly complex,” said Samelson. “Fragmentation is extensive in Europe and North America, while in Asia more and more countries are embracing electronic trading technologies. Trading strategies are becoming more sophisticated and that means there is an increasing need for this type of solution.”