In-House is Out as OMS and EMS Vendors Continue to Up Their Game

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Melina Cross
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1 GREENWICH ASSOCIATES GREENWICH REPORT Q In-House is Out as OMS and EMS Vendors Continue to Up Their Game With technology innovation and regulatory complexity accelerating the pace of change, the level of competition among order and execution management system (OMS and EMS) providers remains consistently intense. In fact, the choice available to traders today is both a blessing and a curse. Regardless of whether traders seek a highly specialized or more comprehensive system, deciding which option to choose and how to best support the development and hosting of these platforms remains a major challenge. This is driving many participants to onboard multiple platforms in their ongoing effort to satisfy different business needs. OMS Outsourcing Upped Overall OMS platform usage saw incremental growth from to, with third-party solutions grasping an additional 20% share from in-house systems during this time. Greenwich Associates research shows that 7 of institutions OMS platform usage is now with outsourced solutions, while only 17% use in-house systems. This trend is expected to continue Study Participants Between August and September, Greenwich Associates interviewed 358 buy-side traders across the globe working on equity, fixed-income or foreignexchange trading desks to learn about trading desk budget allocations, trader staffing levels, OMS/EMS/ TCA platform usage, and ATS satisfaction levels. Respondent Profile by AUM 3 10% 9% 2 Over $50 bn $26 50 bn $21 25 bn $11 20 bn $6 10 bn Under $5 bn No answer Respondent Profile by Investor Type 57% 27% 17% Equity Fixed income Foreign exchange EMS/OMS Platform Usage OMS 1 Total 17% 7 27% 62% 10% EMS 2 Foreign exchange 30% 62% % 58% 19% 60% Fixed income 20% 69% 37% 49% % Equity 81% 21% 7 72% 62% In-house (proprietary/enterprise) Third-party/Vendor-provided Note: Percentages may not total 100%. Remaining proportions for each category is attributed to Other. 1 Based on 204 respondents in including 82 equity investors, 67 fixed-income investors and 55 FX investors, and 304 respondents in including 182 equity investors, 75 fixed-income investors and 47 FX investors. 2 Based on 183 respondents in, including 81 equity investors, 54 fixed-income investors and 48 FX investors, and 289 respondents in, including 176 equity investors, 68 fixed-income investors and 45 FX investors GREENWICH ASSOCIATES GREENWICH REPORT

2 as both equity and fixed-income traders abandon in-house systems, leaving FX participants as the only class to experience growth in both proprietary and vendor-provided solutions. While the use of proprietary technology is on the decline, this does not signal a major re-evaluation of current providers by the buy side. Indeed, from to there was no change in the of traders expecting to subtract an OMS platform. Overall, 8 of traders expect no change to their OMS platform usage, while there is a slight shift toward adding an OMS platform to existing technology. Study respondents cited functionality, compliance tools and product scalability as the three leading factors behind the addition of an OMS. The continued importance of compliance functionality serves to reiterate that OMS platforms must continue to focus on what has long been their core competency. The small fraction of traders expecting to remove an OMS illustrates the difficulty and rarity of unseating incumbent platforms. Of the firms participating in both the and studies that expected to subtract an OMS, not one actually removed an OMS. Additionally, only one firm that participated in both surveys and expected to add an OMS actually did so. Expected Changes in Platform Use and Reasons for Adding Platforms Expected Changes in Platform(s) Usage 1 Add a platform Subtract a platform No change OMS EMS Functionality Reasons for Adding Platform(s) % 89% 7 Respondents averaged two OMS platforms (a primary and a backup) that have each been in place for an average of seven years. Looking across all asset classes, Advent, Bloomberg, Charles River, and EZE Castle all veterans in the space were the top platforms used by our research participants. The relatively long shelf life of these platforms compared to expectations of change further solidifies how deeply their roots are intertwined into firms compliance and trading activity. For firms interested in dropping OMS platforms, functionality is the leading reason, followed by client service and cost, with 5 and 50% of respondents Compliance tools/ functionality 2 49% OMS Usage by Study Participants Product scalability 38% 27% Charles River IMS Bloomberg AIM 22% 2 Cost Client service Access to liquidity venues 32% 2 22% 39% In-House Advent Moxy Eze OMS BlackRock Aladdin Linedata Longview Access to algorithms Other OMS EMS 8% 1 Note: 1 Based on 257 OMS and 214 EMS respondents in. 2 Based on 34 OMS and 33 EMS respondents in. Fidessa Minerva SimCorp Order Manager ITG Macgregor XIP, ITG Position Manager FlexOMS INDATA ipm 0% 10% 20% 30% Note: Based on 256 respondents in. GREENWICH REPORT 2

3 citing these as leading issues, respectively. A bad client experience coupled with high cost is still enough to drive some firms from even the most embedded platforms. The equilibrium of added value versus a fair price for good quality service is a key factor in firms decisions. Liquidity Access Has Become Table Stakes EMS platform use also reflects the broader trend away from building in-house systems. Particularly in the equity markets a mature segment for EMS platforms proprietary systems retain only of total EMS use. Institutional investors have realized the benefits of building in-house are few, and the longterm costs are often higher than those for operating a third-party platform. Furthermore, vendor-provided platforms allow for such a high level of customization that even if you use the same system as your competitor, the implementations will look nothing alike. Bloomberg s EMSX was again the most-used platform by our research participants. ITG, Instinet and REDIPlus were also commonly used. Note that in the EMS space in particular, most platforms fill a specific niche, which in some cases keeps the client list shorter but the volume traded through the platform high. Portware and FlexTrade fall into this bucket, for example, both with strong franchises that have been in the market for well over a decade. EMS Usage by Study Participants Bloomberg EMSX ITG Triton, ITG FX Aggregator Instinet Newport 3 In-House REDIPlus Charles River IMS FlexTRADER EMS Eze RealTick EMS Fidessa Portware Enterprise Neovest 7.0 7% 7% 1 52% 0% 20% 40% 60% Note: Based on 229 respondents in. EMS Hosting Location Hosted at vendor Hosted internally 2 30% 8 79% Note: Based on 116 respondents in including 60 equity investors, 26 fixed-income investors and 30 FX investors, and 204 respondents in including 134 equity investors, 42 fixed-income investors and 28 FX investors. In addition to the prevailing shift to outsourced solutions, a clear trend in how these systems are supported and delivered is developing. Eighty-four percent of all EMS platform functionality reported in our research is vendor hosted. This reliance on vendor hosting is increasingly prevalent in the market, as cloud-based and SaaS solutions showcase their efficiencies in reducing the tax on resources required for internal hosting and managing technology updates. On average, respondents reported using two EMS platforms, which are in place for an average of six years. With an average shelf life closing in on that of an OMS, EMSs have come from easily replaceable execution tools to entrenched liquidity hubs. Looking back over the last decade, a buy-side trader having access to a half-dozen EMSs was not uncommon. Single-dealer systems, dealer-funded multi-dealer systems and systems focused on a particular asset class or region could all be used. Fast forward to today, and the complexities associated with managing multiple platforms, coupled with the level of sophistication found within the remaining top-tier EMSs, has left the buy side singularly focused and in it for the long haul. Traders continue to stress the ability to access liquidity especially in fixed income and FX. For the largest asset managers and hedge funds in particular, direct access to all global exchanges is assumed. Any EMS providers that don t offer this full list are weeded out before they ve even had a chance to demo. For smaller firms with more regional strategies, such global access may not be necessary and choosing a niche provider with access to fewer liquidity points could reduce the price point. GREENWICH REPORT 3

4 We do expect, however, that global liquidity access will become ubiquitous across the EMS landscape even in less electronic asset classes with partnerships forming to fill in any gaps that remain. Cost a Key Driver of Change The largest jump in traders reasoning for changing EMS platforms over the past year was cost. The buy-side s cost-conscious attitude will drive some investors to pick and choose the connectivity and functionality they need while shunning the rest to save money. Cost reduction has overtaken client service, as EMS pricing and connectivity charges become increasingly scrutinized in a more mature, competitive vendor landscape. These concerns have pushed of firms to expect adding at least one EMS by the end of 2015, up from 1 that expected to add one in. While it may seem like a miniscule shift, firms expecting to subtract an EMS platform dropped to from 7% in. This implies that despite the increasing robustness and multi-asset capabilities of today s EMSs, those market participants currently shopping for a new system are looking for an additive system rather than a replacement. As reflected by our research into multiasset class trading (see Greenwich Associates Q Reasons for Using Multiple EMS Platforms Functionality Liquidity Performance Cost Service Other 19% 20% 2 32% 38% 3 40% 48% 4 71% 70% 0% 20% 40% 60% 80% Note: Based on 54 respondents in including 30 equity investors, 15 fixedincome investors and 9 FX investors, and 112 respondents in including 66 equity investors, 20 fixed-income investors and 26 FX investors. report, Cross-Product Capabilities Hold Key for Trading- System Providers), many traders still look for specialist systems as opposed to those capable of handling more. With liquidity access and low cost a given, EMS providers must work harder than ever to differentiate from each other. Despite attempts to create snazzy user interfaces and mobile versions, the trading desk continues to affirm its happiness with simple, spreadsheet-like blotters and easy-to-complete trade tickets. This has left screen shots and basic demos as insufficient means of determining which solution best fits your needs. Furthermore, while cool features provide a great wow factor, our conversations have found that they do little to seal the deal. Instead, functionality that can help ensure best execution and workflow automation tools play an increasingly large role in the buying process. Tough markets and a stronger focus on alpha generation at investment firms drive the need for the former, whereas efforts to reduce the cost of trading given reduced staffing and operations budgets, the latter. It is ironic that downstream integration is often what makes front-office technology so sticky, but never underestimate the importance of finishing what you started. The Ideal but Unrealistic Solution Despite ongoing demand for asset-class-specific functionality, the majority of buy-side traders still voice interest in an integrated OEMS platform one that marries the best of liquidity seeking with the nuance of compliance functionality. But in a continuation of the trend observed in our previous year s research, few are actually using an OEMS despite the apparent excitement. While most EMSs are driven by real-time data, top-tier OMSs rely on more traditional databases that allow for deep compliance functionality and historical analysis. The most likely scenario for OEMS success lies with an existing EMS or OMS provider expanding further into the other s territory. This, in fact, is what has been taking place over the past several years. What is still unclear, however, is whether an adapted EMS with its real-time data focus is better suited to evolving into an OEMS than an OMS with its deeper more traditional data models. GREENWICH REPORT 4

5 OEMS Preferences 31% 39% Methodology Between August and September, Greenwich Associates interviewed 358 buy-side traders across the globe working on equity, fixed-income or foreign-exchange trading desks to learn about trading desk budget allocations, trader staffing levels, OMS/EMS/TCA platform usage, and ATS satisfaction levels. 69% Single trading platform for order management and execution (OEMS) Separate order management and execution management platforms tailored to specific investment needs 61% Note: Based on 199 respondents in including 81 equity investors, 61 fixed-income investors and 57 FX investors, and 306 respondents in including 179 equity investors, 77 fixed-income investors and 50 FX investors. We expect the answer will depend on the needs of each buy-side user. While we speak of the buy side in a single breath, it is important to remember that the institutional investment community is a very diverse group. Including insurance companies, hedge funds, mutual funds, and large multi-faceted asset managers to name a few, their very different investment strategies, holding periods, budgets, and staffing levels all impact which combination of trading platforms is most suitable. n The data reported in this document reflect solely the views reported to Greenwich Associates by the research participants. Interviewees may be asked about their use of and demand for financial products and services and about investment practices in relevant financial markets. Greenwich Associates compiles the data received, conducts statistical analysis and reviews for presentation purposes in order to produce the final results. Unless otherwise indicated, any opinions or market observations made are strictly our own Greenwich Associates, LLC. Javelin Strategy & Research is a division of Greenwich Associates. All rights reserved. No portion of these materials may be copied, reproduced, distributed or transmitted, electronically or otherwise, to external parties or publicly without the permission of Greenwich Associates, LLC. Greenwich Associates, Competitive Challenges, Greenwich Quality Index, Greenwich ACCESS, Greenwich AIM and Greenwich Reports are registered marks of Greenwich Associates, LLC. Greenwich Associates may also have rights in certain other marks used in these materials. Kevin McPartland is head of Greenwich Associates market structure and technology research. John Colon advises on the institutional equities markets globally. Kevin Kozlowski specializes in global securities and trading, including trading desk technologies. GREENWICH ASSOCIATES 6 High Ridge Park Stamford CT USA Ph / ContactUs@greenwich.com

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Selection. Cover subhead here (sentence case) Q2 Month 20182015 Beyond Cover Headline Liquidity: Here Optimizing (Title Case) Product Selection Cover subhead here (sentence case) CONTENTS 3 Executive Summary 4 Finding Exposure 5 Who s in Charge 8