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To Integrate or Not to Integrate?

The traditional line between order management and execution management systems is blurring as buy- side traders increasingly choose to integrate the two in order to streamline workflow and cope with exploding execution volumes. But is one system really better than two?

s lightning-quick trades and an ever-expanding mountain of market data continue to complicate the financial markets, industry experts say buy-side firms increasingly are opting to simplify traders' workflow by integrating their order management and execution management systems.

Traditionally, the systems, whose differences are as stark as the contrast between a delivery truck and a sports car, have been deployed separately. The OMS, which emerged on the buy-side desk in the late 1980s, was built to perform back-office tasks, such as accounting functions, compliance reporting, portfolio modeling, allocations and commission management.

Meanwhile, the EMS, which first saw action on sell-side desks more than a decade after the OMS arrived, is relied on to execute trades and has been deployed on the buy side for a wide range of functions, including the formation of automated trading tactics, customized transaction cost analysis and the construction of algorithms. In fact, many buy-side trading desks are adorned with multiple EMSs, as the systems remain a key tool for traders who execute deals across multiple venues (see related article, page 11).

But in a market where high-frequency trading is driving smaller and smaller trade sizes -- and consequently, an enormous amount of data and executions that must be managed -- the line between the two systems is growing increasingly blurry as more and more buy-side traders choose to integrate the platforms to streamline workflow. "It's definitely happening," says Yuriy Shterk, VP of product development at business software provider CQG.

"From a trader's perspective, especially on the buy side, people are looking for a simple plug-in combination of modules that will give them OMS capability and the EMS capability to access various markets," he adds. "The amount of data coming to traders is so huge that without any tools to help them understand what's happening across various exchanges and different asset classes, it is very, very difficult for traders to take advantage of opportunities."

Increasing Responsiveness

Rainier Investment Management is among the buy-side firms that are seizing the trend. As part of its strategy, the investment manager has integrated Charles River Development's OMS with InfoReach's EMS, according to Justin Kane, director of trading at the Seattle-based firm.

"It's an enormous advantage to us and our clients. It dramatically increased our ability to respond in a market that's extremely volatile and moves extremely quickly," Kane says. "We actually have the [portfolio managers] generating the orders in the OMS, and they're order-routing right onto the EMS. You can't even tell they're two different systems."

In addition to adding some much-needed speed and simplicity to a trader's workflow, the integrated systems have helped the company better analyze transaction costs while lowering commission rates for clients, according to Kane. "If you're going to have TCA that's meaningful and not just to check the box -- the compliance solution -- but something that you can actually utilize to improve the investment process, you need a tool that's going to be able to capture all the data points throughout the life of the trade. As they say, 'Garbage in, garbage out,' " he comments.

Kane explains that to accurately calculate TCA, Rainier needed two sets of data -- one from the OMS and one from the EMS. "You can marry them by matching up the order IDs," he notes. "You send over the order ID from the OMS to the EMS and then map them back together." The improved transaction cost analysis has resulted in lower execution costs for Rainier, Kane says, adding that those savings have been translated into lower commission rates for clients.

The Vendor Response

Meanwhile, competition among the vendor community is heating up to meet the buy-side demand for tighter integration. For example, BNY ConvergEx's Eze Castle Software -- an OMS -- boasts EMS capabilities.

In June, Investment Technology Group announced that it linked its Triton EMS platform with the MacGregor XIP OMS. In making the move, the firm cited a TABB Group survey of 118 buy-side firms that found that interconnectivity between OMS and EMS platforms is the most sought-after innovation on the buy side.

And in January, Charles River Development went a step further in releasing version 9.1 of the Charles River Investment Management System, a platform that integrates OMS and EMS functions into a single OEMS platform. "A lot of our clients were demanding simplification, just less systems," says Tom Driscoll, VP of sales and marketing at Charles River, which has about 300 buy-side clients. "Across the spectrum the feedback we're getting is, it needs to be more manageable, simpler. There are too many applications sitting on traders' desktops."

Beyond a simple workflow, Driscoll adds, firms are looking to consolidate the number of platforms on their desktops as a way to cut costs. "If you look back a couple of years ago, a lot of EMSs were being given away for free," Driscoll says. "Well, that's changed in the last year and a half. Some of these firms that offer these platforms have begun charging, particularly if the client's not trading enough volume and generating enough commissions. So what was free may not be free anymore in some cases. And that comes back to the notion of not only is it simpler to have one system, but you can really save money." As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio

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