From his office overlooking the 103,000-square-foot trading floor -- the world’s largest -- at UBS’s North American headquarters in Stamford, Connecticut, William Sterling has a front-row seat in the battle for supremacy in desktop trading software. But Sterling is no mere spectator. As head of institutional electronic equities trading, the 30-year-old serves as a technology traffic controller -- coordinating the operations of his firm’s traders and the more than 1,000 hedge funds that rely on the Swiss banking giant for prime brokerage services.Keeping all those hedge fund traders happy is no easy job, especially given the recent market turbulence. Hedge funds are big users of electronic execution and algorithmic trading systems, and that has led to the creation of a dizzying array of software platforms that do everything from connecting to brokers and exchanges, monitoring market movements and executing trades to customizing algorithms, tracking portfolio accounting and handling compliance.
As hedge fund managers push for more universal trading solutions, providers of the two main types of software -- traditional order management systems (OMS) and newer execution management systems (EMS) -- are jockeying for their business.
“Both sides are trying to be in a premier position,” says Sterling, who was chief technology officer of New Yorkbased Island ECN from its 1997 founding through its 2002 acquisition by competitor Instinet Group. “OMS has tried to become the premier desktop, but now buy-side traders do a lot more hands-on management, and EMS is starting to gain traction.”
Order management and execution management systems have both become essential tools for hedge funds. Such firms rely on the extensive accounting and compliance features offered by OMSs. EMS platforms, which lack elaborate back-office functions, have been embraced for their speed, agility and low latency (the time it takes a trade to be processed and executed). Integrating OMS and EMS, however, isn’t easy. Traders must constantly switch between multiple systems, which can slow up trades and complicate compliance. Now, as some hedge funds are calling for a simpler solution, OMS and EMS providers are trying to create all-encompassing hybrid products in the race to dominate traders’ desktops.
Like most prime brokerages, UBS wears many hats in the trading platform arena. UBS Pinpoint, the firm’s electronic trading platform, targets midsize and small hedge funds. UBS also partners with vendors that supply third-party EMS and OMS software, and the firm’s technology specialists regularly advise hedge fund clients shopping for competing platforms that can be used to clear trades through the firm. Sterling says hedge funds are becoming more and more involved in the intricacies of their order execution.
“If you are just routing orders to various brokers, the amount of hands-on trading technology needed is relatively limited,” says Sterling, who joined UBS in 2003. “But if you use a number of algorithms, accessing markets directly and monitoring trading across different venues, that is very hands-on and increases demand for technology.”
To capitalize on the strengths of both systems, most hedge funds currently route their orders through an EMS, then send them back through their OMS for compliance. William Cronin, head of electronic trading products for Jersey City, New Jerseybased Knight Capital Group, says that process can sometimes lead to serious backups in order delivery. An investment services company that manages assets -- it owns Deephaven Capital Management, a $4 billion hedge fund firm in Minnetonka, Minnesota -- and provides trading solutions, Knight deals with a large number of buy-side traders. Cronin says the group is tired of running multiple platforms and is eager for convergence between EMSs and OMSs.
“I have one client -- a big, $5 billion hedge fund -- that is doing algorithm business with eight different firms,” says Cronin. “At the end of the day, there is a tremendous amount of copying, pasting and reentering into spreadsheets.”
Alex Prylucki, vice president of investment operations at $2.1 billion New York hedge fund firm Buckingham Capital Management, says the superior execution expected to come from convergence will likely affect firms’ bottom lines. “Stumbling from system to system takes time, which can reduce execution speed,” he says. “Eliminating that could be worth pennies per trade, or it could be dollars -- depending on what you are doing.”
One major obstacle, however, is the rivalry between OMS and EMS providers. Building compatible, integrated systems able to simultaneously perform both EMS and OMS operations necessitates the sharing of proprietary information -- something the two sides are loath to do.
Originally created in the late 1980s to meet the needs of traditional asset management funds trading listed equities for long-only strategies, order management systems automated what now seem like relatively simple trading strategies. By simultaneously coordinating portfolio management functions, compliance monitoring and client account allocation, they enabled multibillion-dollar mutual funds to manage thousands of individual accounts. By 2004, OMS usage among buy-side asset managers was nearly universal, according to a December 2006 report from TABB Group, a Westborough, Massachusetts based research firm.
To capture the business of hedge funds and active traders, firms such as New Yorkbased Investment Technology Group aggressively moved into the OMS arena. In January 2006, ITG paid $230 million to acquire Macgregor Group, whose Enterprise Compliance system is the leading OMS, with a 20 percent market share as of year-end 2006, according to TABB Group. Other major OMS providers include Burlington, Massachusettsbased Charles River Development, San Francisco’s Advent Software and Boston-based Eze Castle Software.
But the growth of electronic trading and the increasing technological needs of complex algorithms have increased the demands on management systems; traditional OMS platforms are no longer sufficient. Saddled with legacy architecture that was not designed for high trading volume, speed or agility, most OMSs have struggled to keep up.
Enter execution management systems, which were designed for active traders. Constructed with minimal back-office accounting and compliance functions, EMS platforms quickly found a place on trader desktops, adding to, rather than replacing, their OMS predecessors. Impressed by the systems’ ability to run complicated algorithms, hedge funds have embraced EMS platforms from providers such as New Yorkbased FlexTrade Systems, Portware and InfoReach. Today, 80 percent of buyside firms use multiple trading platforms, according to TABB Group. But with traders relying on systems from multiple vendors, difficulties communicating between different systems are common. They can also be costly.
Knight’s Cronin recalls the recent experience of a hedge fund client that routes its algorithms through an EMS for execution and relies on its OMS to monitor the status of trades. Moments after one of the firm’s traders began executing an order to buy 400,000 shares of a stock, he received a call from a source offering him 150,000 shares of the same stock at a lower price. When the trader checked the trade’s status on the firm’s OMS, he found that only 200,000 shares had been purchased. So he altered his order on the EMS, deducting 150,000 shares from his original order, and called back his source to buy them at the lower price. But when he returned to the OMS to reexamine the order’s status, he discovered that he had not been given timely information when he originally checked the trade and that the machine had in fact already purchased 300,000 shares.
“The OMS had gotten bogged down and hadn’t updated in real time,” says Cronin. “In our business you just can’t have latency,” he adds, noting that the glitch left the trader with an extra 50,000 shares.
Integration of OMS and EMS would solve such problems, but consolidation has been slow, and many service providers are skeptical it will come about anytime soon -- and some wonder whether it is even necessary. Sterling says there is no question the functions of OMS and EMS need to come together on traders’ desktops, but he is uncertain that means the need for one integrated system.
EMS vendor Instinet is also questioning whether true convergence is necessary. Instinet is betting the current dual OMS-EMS system will remain in place for the foreseeable future and has focused its efforts on improving the way its offerings integrate with existing OMSs. “The hedge fund community wants them together, but there are different ways of putting them together,” says Michael Plunkett, president of Instinet’s North American operations. “If you can accomplish it in some other way, traders don’t care about convergence.”
Institutional trading firm BNY ConvergEx Group, however, believes convergence is imminent. In July, the company -- a partnership between Eze Castle Software, BNY ConvergEx Execution Solutions and private equity firm GTCR Golder Rauner -- began actively promoting a new hybrid system it is touting as an OMS that has EMS capabilities.
“Our traders are aggressive and want full control -- the ability to move fast and not be encumbered by 15 clicks,” says Eze Castle chief operating officer Jeff Shoreman. He notes that the combined BNY/Eze Castle system automates many of the redundant tasks involved in operating side-by-side systems, reducing functions requiring more than a dozen clicks on most systems down to just two.
Still, some EMS vendors are betting that such hybrid systems will never replace pure EMS platforms engineered for the specific needs of active traders. Allen Zaydlin, CEO of New Yorkbased EMS vendor InfoReach, says the reliance of existing OMSs on intricate accounting programs makes them inherently slow. “They are like trucks -- built to carry a heavy load,” says Zaydlin. “But if you believe getting to market faster is important, you may want a race car.”
As OMS and EMS providers continue to work toward convergence, hedge funds are keeping close watch on the more-advanced offerings beginning to emerge. “There is a lot of work being done on the tech side within the OMS and EMS community to make all this easier, simpler and quicker,” says UBS’s Sterling. “It’s happening slower than everyone would like, but it’s definitely happening.”
