THE HEAT IS ON

Heather McKenzie looks at how OMS/EMS can keep the flame burning.

There is no doubt that the sellside is under pressure. Their buyside clients have heightened expectations regarding execution and pricing while regulators are calling for greater transparency and better execution. At the same time, they are trying to prove their worth while seeking to reduce their costs, including commissions, exchange and clearing fees.

One way is that sellside firms must recognise the “increasingly urgent” need for the deployment of order management system (OMS) technology capable of more than simple execution of individual assets, according to a TABB Group report, The Transformative OMS: From Tickets & Timestamps to Today’s Technologies. In order to differentiate and retain as well as win new clients, they need to upgrade their product offerings and revamp their OMS-related technologies.

The report highlights a number of key trends that are driving significant change in the relationship between buyside and sellside firms. Some of these are regulatory, of course, including the Dodd-Frank and the Securities and Exchange Commission’s recent move toward expanding the Regulation NMS (Reg. NMS) Rule 606, which governs broker order routing practices. In Europe, the latest incarnation of MiFID is also a game-changer.

The other driver, according to TABB is the increased scrutiny of investment managers. They have reduced the number of execution partners by as much as 50%, depending upon the size of the firm. In addition, they are re-evaluating services such as research, trade execution or capital commitment that were once considered an unquestioned value.

Another trend noted is the migration of sellside personnel to buyside firms. This has not only increased the sophistication of their trading standards but also raised the level of understanding of algorithms as well as electronic execution strategies and trading venues. “Today’s investment managers have fully embraced electronic and algorithmic technology and have complete access to a full complement of trading tools once reserved for the brokerage firms that covered them,” says the report. Moreover, asset managers have whittled down their broker lists mainly due to shrinking commission wallets on the back of internal cost cutting.

A true reflection

The picture painted in the report is one recognisable to many observers of the industry. Chris John, head of the revenue and expense management business at investor communications and technology company Broadridge says there is huge pressure on sellside firms at present around cost management and expenses. “Sellside firms are focused on being more transparent and efficient,” he says. “But rather than looking at it from a trading desk or trading group point of view, they are looking at it from a higher level from the firm’s total expenses and what they are paying out in commission, exchange and clearing fees.”

These expenses can reach totals of hundreds of millions of dollars annually, he says. “Everything is being looked at as a candidate for saving money and creating efficiency through re-engineering or outsourcing. The idea is that the savings can be passed on to buyside clients in the form of lower cost of execution,” he says. Post-trade costs represent about 65% of the total cost of execution so this is the area where sellside firms are looking to create the most efficiencies across their organisations.

Sellside firms have a greater challenge now in determining their relevance to buyside firms in the equities execution space, says James Blackburn, global head of product marketing, equities at Fidessa, a trading infrastructure and software company. “The pie is getting smaller; buyside firms are driven by cost and regulatory pressures and are becoming much more discerning about the sellside partners they choose.”

The changing dynamics have led to a polarisation of the market, with large wholesale brokers (tier one banks) and niche, specialist buyside firms doing best. “The firms in the middle, that either don’t have the size or don’t specialise in particular geographies, sectors, M&A or research, have an identity crisis and are not doing very well at the moment,” says Blackburn.

Anna Pajor, a lead consultant at London-based consultancy GreySpark, agrees the environment has become much tougher. “Before the financial crisis, sellside firms looked at how to target clients. Today they are much more likely to examine whether there is a reason to attract particular flows.” Sellside firms are focusing on specialising and providing quality services in a particular industry or market, or they are reviewing all of their services and the profitability they deliver.

Pajor adds, “This means that some brokers are deciding particular clients are not profitable. This actually makes it easier for buyside firms to determine which brokers to retain – if a broker says it doesn’t want your business, then it is an easy decision.”

Technological solution

In turning to technology to cope with this changing environment, TABB Group found that sellside firms are prioritising OMS/EMS technology initiatives, followed by tools and analytics (including transaction cost analysis), technology infrastructure and algo development.

The report states: “Global firms are focused on initiatives that will revamp their legacy OMS platforms and other systems built in-house. Top of mind for all sellside firms is the desire to consolidate OMS functionality across all asset classes. At many boutique and agency firms, however, technology initiatives centre on implementation of off-the-shelf OMS and EMS products, followed by the evaluation of algorithmic-suites.”

Across all firms, nearly half plan some type of OMS technology projects or related efforts to upgrade analytical tools and infrastructure. TABB notes that this highlights the overall level of dissatisfaction with current OMS and technology providers. This also reinforces the consultancy’s view that, going forward, firms must aggressively seek out technology partners able to provide more robust solutions in these areas.

Bud Daleiden, managing director, product management of Eze Software Group, says: “Much like the buyside has done in the past, we’re seeing our sellside customers demand a convergence of EMS and OMS capabilities as they attempt to reduce overall trading costs while delivering quality executions to their buyside customers.” Some examples of features that firms are frequently looking for include the ability to auto-route certain orders to the street while directing others to the trade desk for high-touch execution, more advanced intra-trade TCA and multi-asset trading support.

Daleiden adds, “Sellside desks are finding that auto-routing certain orders, typically those that are lower volume and marketable, allows their traders to focus on actively working more complicated orders trying to get best possible execution. Then, while working the high-touch orders, sellside traders are increasingly relying on intra-trade TCA to provide real-time comparison to various benchmarks.”

This helps the traders determine where they need to adjust behaviour to work orders more aggressively or passively. They are ultimately looking for the most cost-efficient way to seek liquidity as well as the tools to help them identify the best venues. Desks are discovering that they can minimise their internal costs by using a multi-asset OEMS, according to Daleiden.”This allows the same traders to work equity or derivative orders and ultimately permits the desk to streamline trade desk support.”

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