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.
All of the financial services focused data centers I’ve spoken with have expressed much more concern about running low on power than on running out of floor space. I’ve seen cages with my own eyes that are half empty because the servers used by the resident require double the power generally available per rack in that data center. Available kilowatts per rack are skyrocketing, with many in the low double digits. We will see even higher power densities in the not to distant future:
“Servers are getting faster and faster and because they are faster, they are consuming considerably more power,” said Tabb Group senior analyst and report author Kevin McPartland. “To make the best of use of the limited prime data center space around the major market centers, they need to have very high power density to be able to support as many servers as the clients in the data centers want to put in them.”
Not only does everyone on Wall Street need faster servers, but they need them to also take up less space and less power. No small order. This story discusses where “exchange in a box” is feasible.
The amount of market data is growing at the rate of 100 percent … every year, notes Kevin McPartland, the well-wired Tabb Group analyst…..“The prop guys aren’t going to want to put their software in someone else’s box,’’ says McPartland. “So that begs the question: does the technology drive the business or does the business drive the technology.”
I participated in a panel discussion this morning focused on opportunities for execution venues an exchanges created by OTC derivatives reform. As legislation will likely push standardized OTC products onto execution platforms (not necessarily exchanges mind you), the opportunities for these platforms (many owned by inter-dealer brokers) are numerous. Securities Industry News covered the event:
“We have the benefit of building a market structure from scratch,’’ said Tabb Group analyst Kevin McPartland, “knowing everything we know now,’’ after a financial crisis spawned in large part by the weight of paying out credit default swaps in fall 2008 by AIG and other players.
I gave a presentation at 8a this morning at a Wall Street Technology Association (WSTA) event, and SIN had a story on their website by time I was back at my desk. Talk about real-time reporting. Linux is big on the server side for Wall Street and will only get bigger. An excerpt:
The biggest firms – aka, bulge bracket firms – have the technical prowess to use Linux and adapt applications to run on it, McPartland indicated in an address to the Wall Street Technology Association at the Westin Times Square hotel in New York.
“Linux is free and it doesn’t crash,” McPartland said, in summation.
Trade directly with your broker or look to a system that consolidates multiple quotes? There are benefits to each approach, but as things get more electronic in the OTC markets (with or without new derivatives regulations) this question will be front and center for many. My comments:
“It is important to have an individual brand and storefront that keeps active customers engaged,” says Kevin McPartland, senior analyst at Tabb Group. Because “sometimes if I know I want a Mac rather than a PC, it’s easier to go to the Apple store.” The latter is analogous to a buy-side customer seeking a specific trade or pricing online from one longtime or trusted bank counterparty.
The guys from Exegy who run the Market Data Peaks website say market data rates will only continue to increase. I agree – although I’m not sure doubling in 2010 is necessarily in the cards. Either way everyone needs to be ready. An excerpt:
Data rates will certainly continue to grow with trading firms keeping considerable excess capacity on hand to handle unexpected market events,” noted Kevin McPartland, a TABB Group senior analyst specializing in OTC derivatives as well as technology issues. “We must also look to OTC markets such as FX and US Treasuries that are seeing huge growth in automated trading – where automated trading goes, increased data rates follow.
I got a demo and this is pretty cool stuff. I’m sure we’ll continue to see initiatives like this from financial services focused software firms:
“CEP and open source have both seen major adoption in financial services over the past few years,” said Kevin McPartland, senior analyst at TABB Group. “CEP has helped the industry to deal with ever-increasing data volumes and complexity while open source has helped many firms to find software development efficiencies. Bringing these two ideas together into open-edge model could help drive collaborative innovation in the event processing space.”
“The major issues will stay pretty close to what they are in the House,” says Kevin McPartland, a senior analyst at New York-based research firm Tabb Group and author of “OTC Derivatives Regulatory Update,” a report released January 11 on the outlook for derivatives regulation and its impact on the industry.
McPartland says clearing houses could be big winners, as they expand existing electronic systems to clear OTC derivatives contracts between member firms. In the case of standardized swaps contracts, the technology employed will streamline the post-trade process. This will remove considerable operational risk from the once-manual process of clearing OTC derivatives.
The trick is to make sure the money being spent to remove delays will be more than reimbursed by the profits achieved in the trading strategy that is improved by it, says Kevin McPartland, senior analyst at Tabb Group.
“If I’m spending $1M to get one microsecond faster, will I make ten times what I was making before?,” he asks. “Another way of putting it is to say that latency budgeting involves making sure, when you spend so much money over so many weeks on an upgrade effort, that you see multiple times the value spent in additional revenue.”