Survey Finds Buy-Side Automation on the Rise

Preliminary results of a survey researching the extent of trading system automation in the fixed income and equity arena reveal that a vast majority of respondents are currently or are interested in transmitting trades electronically to brokers.

The survey - conducted by New Jersey-based The Spaulding Group and released last week at the "Buy Side Trading Technology Forum" in New York - has not yet been completely tabulated, but of the 90 respondents thus far, the number automating trades is surprisingly high, says president David Spaulding.

"I think it's extremely positive that 50% say they are transmitting trades electronically and another 36% say they would like to," notes Spaulding. This preliminary conclusion leads Spaulding to say that there are considerable opportunities available for those not already automated as the electronic entry trend catches on.

One of the most important factors in the move to electronic order management systems (OMS) such as The MacGregor Group's Predator or the Longview Group's LandMark system is the compliance feature, which can prevent costly trade mistakes. "You increase your risk of error if you're doing things manually, or if you're picking up the phone and communicating an order to a broker verbally as opposed to electronically," Spaulding explains.

Spaulding also cites a volatile market along with increased market participation and trading as reasons that buy-side firms are automating. As the number of money managers utilizing OMSs begins to climb, Spaulding says client interest in the firm's technology may also be on the rise. While many are not aware of the availability of tools to automate the trading process, technology such as compliance may be more apparent in the future.

"I think clients are mainly interested in the manager and if they're doing an effective job," says Spaulding. "But if they have put certain restrictions on their manager and then find a trade confirmation for the purchase of a security that runs contrary to those mandates, then I think some of these issues are going to be brought up."

While the survey doesn't question firms about profit motivations and competitive advantages behind automation, Spaulding says there could be an advantage if the system helps firms to invest wiser, in turn producing better performance numbers. "There's probably some reduction in transaction cost you'll see in returns, but it's transparent to most people that they have a trading system," he adds.

Why haven't all investment managers employed OMSs if it reduces error and can save time and money? Spaulding says, "it's an investment in time and resources and given the amount of competition that has come about, it's probably a little confusing." In an active market, firms are very busy and the automating process may be a bit daunting, notes Spaulding.

Firms choosing to move in the electronic direction have many options in the systems available these days and Spaulding says even small firms can implement systems to fit their business. "The attractiveness of this market is you have some low-end systems like Advent Software's Moxy which is great for smaller firms," Spaulding says. "So they can get something that won't have as much functionality as the higher-end, but still provides some good tools."

There is also always the option to build rather than buy, but Spaulding says this probably is not the best choice for the majority of firms. "People set off trying to build their own system, thinking it's not going to be too hard, and they find out that there is really a lot to it, and people that build tend to end up with very little functionality," he adds. He does point out, however, that some firms requiring greater fixed-income functionality often choose to build their own because the OMS vendors, for the most part, have only recently begun to tackle securities other than equities.