THE MULTI-ASSET TRADING DESK MARCHES ON.
Frances Faulds looks at what is helping, and what is hindering, the move to multi-asset class trading.
The jury is still out on whether order management systems (OMS) and execution management systems (EMS) can, should or will, be integrated. However, there is agreement that the compliance capabilities they bring is driving the buyside’s demand for more sophisticated multi-asset trading solutions and that further automation will both drive down cost and fuel the next round of growth.
For some, the emergence of the OEMS, merging order and execution management systems, is driving greater levels of automation. Oren Blonstein, managing director, product management at TORA, which now offers an OEMS, TORA Compass, believes they should be closely coupled. “Automation in multi-asset trading is highly dependent on the integration between a firm’s OMS and EMS. To the extent these systems have been developed organically, and in tandem, the greater the chance of success.”
By contrast, Matthew York, product owner, fixed income, at Flextrade, thinks that the inherent inflexibility that creating an OEMS brings weakens both. “Clients should be able to select the best solution for both inward facing OMS and market facing EMS and should be able to decouple and replace either side as need arises,” he says. Flextrade which works with the OMS providers, was one of the first EMSs, and over 75% of its clients are equity shops. The firm has been looking at execution management to trade across the asset classes for the past four or five years.
John Adam, global head of client and product strategy at Portware, believes the distinction between OMS and EMS is fading and that integrated and combined solutions are becoming the expected norm. “This is because the buyside has a better experience, and reduces operating costs, if the order and execution management systems are entirely coupled. Streamlined OEMS workflows are what the buy-side is implementing now, whether from one or multiple vendors. The next focus is implementing AI, automating steps in the trading workflow, and unlocking operational efficiencies.”
Portware’s integration with FactSet means it can offer end-to-end management for every component of the portfolio lifecycle – from portfolio analytics and performance attribution, directly into generating the order in the order management system, compliance, portfolio modelling, then seamlessly connecting to the trader’s desktop and EMS. In November 2016 FactSet acquired Cymba and in less than a month integrated it to create an OEMS. Today, Adam says, for Portware’s largest customers, which are the furthest along with automation, it’s really a case of trader intervention by exception in a multi-asset trading environment.
He adds: “We have crossed that threshold where more than 50% of the orders going through our EMS today have no manual intervention because the traders have deployed automation and machine-learning to handle smaller orders. The trader’s attention is better used elsewhere: on larger and more difficult orders, where their skill and sell-side relationships generate alpha for their firms.”
Many larger buyside firms have built a single OMS for end of day transaction reporting, record-keeping, allocations and best execution, and are connecting this to the various EMS, for the different asset classes. However, as Michael Horan, head of trading services, at BNY Mellon’s Pershing, which provides an outsourced trading desk for buy-side wealth managers and mid-sized sell-side clients, points out this is not the case for smaller firms. They will just have an EMS, and they are now starting to ask vendors to build more OMS and middle office functionality into the EMS.
Horan says: “The creation of the OEMS has hit the nail on the head. A lot of the EMS providers are trying to move into the OMS space for the small to the medium sized firms, which cannot justify having an OMS or multiple EMS. There is definitely a growth area in the market for the expanding capabilities of a standard EMS platform.”
While he believes a MiFID II compliant, multi-asset class EMS is the most sought-after item by the buyside today, he also notes increased regulation has both changed and strengthened the role of the EMS. “There are a lot of compliance obligations and demands that are being placed on EMS providers now, a lot of technology and investment, and a lot of responsibility,” he adds. “Today, any EMS demo starts with the compliance checks and pre-trade controls and not with trading capability. That would not have been the case five years ago. The role of the EMS provider has changed.”
Fixed income stands apart
While high levels of automation are being attained in the equities and FX market – Flextrade clients have upwards of 50,000 orders per day – fixed income still lags behind in terms of automation. This is despite the recent strides that have been made in the provision of AXE aggregation, two-way streaming prices and increased automation of the more liquid end of the market.
In order to make the asset class more easily automated, FlexTrade’s York believes a major change is required at bond issuance level, especially in how corporate bonds are issued. “My view is what needs to happen is a change in the corporate bond issuance similar to what has happened in the global loans market, where a panel of banks creates a maximum underwriting for a company and then the company decides when to draw down those lines,” he says. “The issuance terms should be standardised and there needs to be flexibility to re-open bonds to further issuance. What this will mean is that they are made more fungible and the secondary market will have far more liquidity. Long-term this is what has to happen for fixed income issuance.
York adds that “interest rate and credit default swaps were completely customised and OTC but now trade on standard terms, standard tenors and are lot more fungible. As a result, there is a greater amount of electronic trading and it is much easier to price them. If we can get over the hurdles around issuance in fixed income, align terms with the swaps, the technology can take it from there. It is definitely a challenge of market structure over technology. Technology is not the blocker at the moment; it is the archaic structure in fixed income.”
Portware’s Adam though believes that a good EMS is designed to handle the lack of standardisation across the asset classes. While fixed income has a long way to go to catch up with the equities space, algorithmic and automated trading in equities is developed and mature and fixed income will go along the same lines.
“Of course, there are no standards but this is where EMS provides value,” he says. “There are mechanisms in a well-designed, multi-asset EMS to interface to and capture every one of those trades. Voice brokerage shouldn’t be an excuse for not offering a comprehensive solution in fixed income, we need to embrace it. There will be voice trading for a while, but there are other new technologies coming up that will supplant voice trading, just as it has in every other asset class. It is only a matter of time.”
With multi-asset trading becoming increasingly mainstream, EMSs are accelerating the use of machine-learning and artificial intelligence, helping traders to better align trading styles with portfolio managers. Moreover, as Adam notes, “the purpose of all of this is to introduce the technology that reduces the cost of trading and enable the buyside to scale the business in a way that they can compete with a passively managed fund.”
MiFID II is aimed at tackling transparency in the fixed income market by making it trade more electronically and making more post-trade data available, but for now, the OMS/EMS providers are helping to close the gaps.