Hayley McDowell: How has the execution management system (EMS) / order management system (OMS) market evolved since FlexTrade set up in London?
Vikas Kedia: When we started out in London in 2002 the OMS had always been a mandatory requirement for the buy-side, whereas the EMS was a more advanced feature. In some cases the OMS provided enough for those firms to carry out the execution, but in the last 15 years the EMS has grown to a point where it has now become mandatory. We feel as though the OMS has not been able to keep up with the advances and the requirements that sophisticated execution workflow needs. This includes everything from connectivity to the fact they are often database driven which can affect speed. OMS latency is currently in seconds, whereas EMS latency was in milliseconds but it’s now in microseconds. The OMS simply has not been able to adapt to the increased level of speed that an EMS is expected to carry out now. We have a client currently testing our EMS for 10 million fills in a single day, and this is something an OMS simply can’t keep up with. The OMS is still more about keeping track of accounts or positions and that’s a very different functionality.
Having an EMS on the desk is no longer considered a showstopper or massive investment for buy-side firms. In FlexTrade’s case, it has also become a software-as-a-service model, meaning there is very little the client has to do now in order to set up the EMS. The front-end is adaptable in terms of design and the software can look exactly like the systems buy-side firms already have in place. It allows asset managers to set up the system and immediately carry on with their business without having to readjust the way they interact with their EMS.
HM: How has regulation impacted your business?
VK: The heart of regulation is in a good place. It’s there to protect the investor who has no control over how their money is being managed. From a business point of view, MiFID II has been very good for us because it requires the buy-side and pension funds to move towards more electronic trading. They are now required to have an audit trail of every task and every transaction, everything to do with the order. This has made the electronic flow or communication of orders mandatory and there are many ways to do this, but as an EMS provider we believe this is showing the importance of having that system in place. We have made sure the events of an order are audited, saved on a database and recorded – in a way it helps the buy-side prove they have been doing their job.
From an innovation point of view, regulation has allowed us to focus on things that help improve the traceability of the workflow. There are more efficiencies that can be achieved by asset managers in order to obtain best execution for their clients. We hear the phrase best execution all the time, but the true benefit of it is to the end investor. It makes sure they are getting the least amount of transaction costs and the maximum performance of their funds. I truly see all regulation as a positive thing for the entire industry. Although I hope increased transparency does not result in an increased cost and that’s where I think the regulation needs to be constantly revised. The fundamental idea is to reduce the cost, but are the requirements adding too much overhead or making the situation worse than before? That’s what needs to be measured in a clear manner. That feedback loop needs to be analysed constantly and the regulation shouldn’t be considered a ‘tick-box’ exercise by any firms.
HM: How much of an appetite for a combined OEMS is there on buy-side?
VK: Ideally there would be an OEMS that provides the best of both systems, with just one service and one point of call making it an easier overall solution for the buy-side. However the two system functions, needs and latency are very different. Putting these together in an efficient manner is in some ways considered the holy grail of FinTech from a buy-side point of view. It’s hard to say how close we are to achieving that, and not to say that there aren’t buy-side firms using their OMS as an EMS or that a combination isn’t happening already, but as the sophistication of the trading desk is increasing, there is a choice to be made. Systems considered best of breed are allowing firms to choose and keep them separate with minimal pain points. I believe in many ways, OMS and EMS are comfortable in their own space because they are both very specialised functions.
The appetite for an OEMS from the buy-side is certainly there, but ultimately it’s difficult to combine these systems. One of the first things we are asked about our EMS is about whether it is multi-asset. Five years ago we were selling a heavily equity-based system, but last year I would say pretty much all of our large sales have been multi-asset. The asset manager may not be trading multi-asset yet, but they will not decide on an EMS or OMS solution unless they know it is covering their next stage of growth. I’m sure some firms have an OEMS type of system that can cover a small subset of asset classes but for the very large asset managers and pension funds this is not of interest to them.
HM: How does FlexTrade differentiate itself in such a competitive market?
VK: It has been a cyclic process. When FlexTrade originally set up in the late 90s the EMS didn’t exist, it was only banks that provided such solutions and FlexTrade was the only company to offer an independent EMS. It suddenly became quite a cool thing to own an EMS and the margins were really high, so we then saw a huge explosion of EMS providers in the market. FlexTrade really had to adapt to compete with a large number of these firms who were able to price the systems considerably lower. Other larger companies like Bloomberg then started to provide an EMS for free and the cycle went downhill once they came into play. Smaller providers have struggled a lot, but we were lucky to be big enough at that stage to live through that, and to then find our unique angle of being the customised solution for larger asset managers and multi-asset trading desks. Right now, many EMS providers have continued to struggle. We’ve seen many that have been bought by other providers or have decided to focus on a smaller subset of clients. For some it became more about signing on large clients and increasing revenues in order to flip the company and that’s where it went wrong for so many providers. You can’t just provide the solution and move on. This year, I feel as though there has been a reduction in the number of EMS providers but there are still new providers popping up. Competition from new providers is a positive thing as it keeps us, and our competitors, on our toes.
Investing in your company is one of the most important aspects of success. FlexTrade currently has around 450 employees and 150 of those are developers who work constantly to ensure the software can keep up with the requirements of the clients. We won’t ever get to a point where we reduce our research and development teams because without that smaller competitors could take portions of our clients. We are in a good place to keep up with the competition more from the smaller companies now.
HM: What’s next for FlexTrade?
VK: I would say creating a truly multi-asset solution which spans all of the different trading desks. We want to increase our coverage of fixed income particularly because there are a lot of different components to that instrument and servicing that can be difficult. In terms of products, we are working a lot on the indication of interest (IOIs) which work across equities and fixed income. We believe brokers will be keen to expand their use of these in a post-MiFID II world because it’s a way for them to differentiate themselves from each other. Transaction cost analysis (TCA) is another big component and on the back of MiFID II we don’t want to provide TCA again as a ‘tick-box’ exercise, but we want to show the benefit of MiFID II by providing the user with useful reports. These can reveal the inefficacies in the trading lifecycle, which is so important for asset managers.
Last year we also worked with technologies like virtual and augmented reality and we launched our algo wheel. Although the augmented reality is not something I expect to go-live in 2018, we will continue to develop those tools. As for the algo wheel, I expect we will rollout a few enhancements and upgrades this year as more and more clients sign up to the service. Our development is driven by our clients who tell us how to improve the technology or what features they would like to see added to the service. We are lucky to have a number of large and forward thinking asset managers as clients who are constantly looking to get the latest thing in the EMS space. That allows us to stay ahead of our competitors in many ways.