With Leo Li, Equity Operational Risk Manager, Vanguard
Many asset managers currently use one Execution Management System (EMS) to manage connections with all brokers. Usually this situation starts with the trading desk on-boarding an EMS to manage all connections, and traders eventually become intimately familiar with the layout and functionality. While there are benefits to having a single system, such as improved operational efficiencies and lower costs of maintenance, this leaves the asset manager with a single point of risk should the single EMS connection become unavailable. Asset managers historically have considered the EMS as part of their internal systems that can be operated and controlled internally. However, as we have seen over and over in the past few years, there is tremendous risk for trading desks if an EMS provider suffers a failure due to connectivity issues, natural disasters, or regulatory sanctions.
Let’s think more like risk managers.
Asset managers should consider implementing multiple EMS’ in order to mitigate the potential risk of losing functionality of its single point system. While the amount of time and resources to implement new systems could appear overwhelming and redundant at times, the asset management industry as a whole could benefit from having multiple systems. The key to success is getting all the traders familiar with multiple systems. Although each EMS provides similar functions, operationally the subtle differences among EMS’ could cause major errors, especially when it comes to selecting the right algorithm and trading strategies.
We have seen scenarios where a person or team is replaced by a piece of technology / software. At the same time, we also realise that some human redundancy has been reduced in terms of coverage and backups. When an employee is out, there should be coverages for the role and responsibilities, especially when it comes to trading related functions. When connectivity software is down, do all front office operations have a backup?
We should think like risk managers as often as we think like asset managers, consider what could go wrong, and to try to address those areas before any glitch occurs. The hardest part is to anticipate potential points of failure in a relatively low volume, stable environment. From a different perspective, if we take the one FIX connection to EMS out of the trading equation, what would happen to the front office? Does business continuity get impacted? How long can the business function without the single EMS? With that picture in mind, what do we wish for in order to make the situation better (i.e. direct connections, multiple EMS’)? Then start the solution from there.
The solution will likely vary from firm to firm as each has its own internal procedures and processes related to the EMS and process of execution. Each firm, for example, should consider the full life cycle of an order; in terms of how the order is generated and how it is executed. At any stage if there’s a single point of failure, especially when it comes to order routing via FIX message, there should be multiple points of access to the top counterparties.
This is similar to a stream of traffic travelling over a single bridge. But if the bridge is temporarily unavailable, are there detours? Some questions to consider:
- Does the firm have alternative means to router the final destination via FIX message?
- Are the front office traders familiar with the alternative EMS in terms of functionalities?
- Can the connection also be made directly to the broker and with Order Management System as a gateway?
- Can trading be done over the phone? If that is an option, is the compliance group comfortable with pre-trade compliance not running?
- Would the counterparties be able to take all the trades over the phone?
These are all questions that can be resolved by encouraging firms to have redundancies within their front office operations.
Potential solution and approach
The cost and complexity of adopting additional EMS’ can vary greatly depending on the firm’s size and trading volume. And the infrastructure may take a long time to establish, especially when an asset manager would like to be connected with a large number of counterparties. At the same time, it is also crucial to ensure that traders become familiar with the alternate EMS’ functions.
We should also encourage EMS providers to develop a seamless process for transitions. This could potentially lower the cost of transition for most firms. Asset managers should also be cognizant that just by having two EMS’ does not mean redundancy if one relies on the other to be connected.
FIX messaging has evolved many times in the past to accommodate new trading strategies and algorithms, and firms have rapidly adapted to the new standard, we believe it is time for the FIX connection infrastructure to evolve as well.
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