Everyone likes to talk about tablets these days – especially iPads. What were discussions on cell phone trading in the early part of the last decade are now conversations about trading on iPads. As you’ll see from my comments, I’m not sold that institutional traders will really ever see much need to trade from iPads (let alone trading away from the desk at all), but they certainly are compelling when it comes to consuming content whether market data or research reports. All of that said I do love my iPad, but in no way is it replacing more laptop (or cell phone for that matter).
“I still think there are more efficient ways for an institutional trader to trade rather than to sit there and tap away. If you were really going to be actively trading, I think you would still open up your laptop.”
This article reviews how an SEF is likely to be defined by the CFTC an who some of the likely players in the market will be based on my video conversation with Ivy Schmerken a few weeks ago.
Regulators at the CFTC and Securities and Exchange Commission are drafting the rules that will define what is a major swap participant and what is a SEF. (Rules will be posted by Dec. 9th for comment, and final rules are due by July 15th). “It’s similar to an ECN for the swaps market,” explained McPartland, who said, we should think about SEFs “as price discovery platforms where you can execute and can have more transparency.”
This is my latest research report looking at the buy side’s usage of trading technology. See the press release below, the executive summary at tabbgroup.com and coverage of the study from Securities Industry News and Advanced Trading.
NEW YORK & LONDON – (Business Wire) According to new research from TABB Group, the integration of order management (OMS) and execution management system (EMS) functionality is now the driving force in streamlining the buy-side’s desktop. Although nearly 50% of the buy-side trading community receives OMS and EMS technology at virtually no direct cost through their broker relationships, TABB forecasts a 5% and 1% CAGR (compound annual growth rate) in OMS and EMS technology spending, respectively, between 2010 and 2012, by buy-side firms.
With 100% of TABB’s research study participants now using an OMS, EMS or both, the buy side’s top priority, says Kevin McPartland, senior analyst who authored the study, “The Buy-Side OMS and EMS: Integration, Expansion and Consolidation,” has switched from widgets and algos to integration. “With an eye on the middle office, back office, reference data system, analytic package or real-time market data, the trading-floor bouncer is working hard to throw double keying out the back door.”
However, McPartland notes, brokers’ ability to provide trading platforms gratis to all of their buy-side customers will shrink in the next three to five years as TABB Group believes the buy side will begin paying for these connections as brokers follow a cost-conscious approach to order-flow acquisition. They also believe that the 3% fewer buy-side firms using broker-funded EMSs in 2010 than in 2008 signals a trend. A strong increase in spending hard dollars for platforms further highlights the model shift. “While existing practices will not die, in the future, brokers will be as willing to foot the bill for connectivity as a guy is to foot the bill for dinner after a bad date.”
McPartland says that adoption rates show US equity-focused, buy-side firms rely completely on front-end trading technology. “In 1996, adoption levels were at 96%. Four years later, we’re at 100% and while that 4% jump might not appear large, it represents 400 to 500 new customers for platform providers. For OMS/EMS providers, competition is fierce. Even though black boxes now generate a disproportionate amount of volume, trading systems act as the gas, brake, steering wheel and airbag. With no cash-fort-clunkers program in sight for Wall Street, innovation, integration and old-fashioned customer service are factors in how vendors differentiate themselves and determine which car the buy-side drives.”
He also points out that the average number of EMSs on the buy-side desktop dropped from an average of 3.4 in 2008 to 1.6 in 2010 due to management demands for greater execution efficiency, true multi-broker access via a single platform and a push by EMS providers to be one-stop shops.
Analytics, charting, algorithms, risk management, P&L calculations and other core trading-system functions will see incremental improvements over the next several years, and that multi-asset and multi-geography access will become more common and robust as platforms once focused on a single market or asset class expand outward. “Co-opetition between platform providers will grow,” McPartland says, “and become more contentious due to expansion into new areas that will step on toes and strain partnerships.”
The most dramatic changes will take place under the covers, he adds. “Integration between EMS, OMS and the other systems that make up the complete trading lifecycle is the hottest issue for buy-side firms, and providers will need to work diligently to ensure inter-system connectivity is seamless and quick to implement. However, despite the efforts of some to merge the OMS and EMS into a single platform, messaging technology and protocol standards will allow disparate systems to communicate as if they were one.”
He notes, though, that there is no consensus between buy-side traders concerning their desire to merge the OMS and EMS into a single OEMS, due to their concerns over adopting an unnecessarily complex system.
The 40-page study with 37 exhibits is based on interviews with 118 US-based buy-side traders, split approximately 50% among hedge funds and traditional asset managers. One-to-one discussions covered system usage, likes and dislikes, business drivers, changing requirements and what traders expect to see from OMS and EMS providers going forward.
The study is available now for download by TABB Group Research Alliance Equity clients and pre-qualified media athttps://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write firstname.lastname@example.org.
A video summary of the study is also available at TabbFORUM, www.tabbforum.com, the online community for capital markets professionals.
Even though the House bill is not perfect, McPartland feels, “This is a good thing. This is actually improving transparency,” he says. Still, the details on execution and the ideas of clearing and reporting that need to be worked out, he adds.
“Systemic risk is still the underlying issue,” says TABB’s McPartland. “Derivatives reform is not really about markets reform; it’s all about reducing systemic risk.”