THE FUTURE FINANCIAL NETWORK?

Umberto Menconi, Head of Digital Markets Structure, Market HUB at Banca IMI investigates the rise of the EMS and asks whether we are seeing the development of the first global financial network link.

Order Management Systems (OMS) are well established, but the rise of Execution Management Systems (EMS), and their integration, is changing the face of trading. Until fairly recently, EMSs could accurately have been described as “software applications utilised by institutional tradersdesigned to display market dataand provide seamless and fast access to trading destinations for the purpose of transacting orders. They contain broker-provided and independent algorithms, global market data and technology that can help predict certain market conditions. One of the important features of EMSs is that they can manage orders across multiple trading destinations such as stock exchanges,stock brokerage firms, crossing networksand electronic communication networks.”

However, while that description was probably true in the past, more recently EMSs have added more technical functionalities and broadly extended their application to other products like fixed income and foreign exchange (FX), as buyside traders’ strategies have become more multi-asset in approach. As a result, the technology is changing rapidly.

In a new holistic approach, EMSs can currently offer, to varying degrees, a fully multi-asset integrated, intelligent, flexible, highly configurable, reliable, scalable and comprehensive open architecture proposition to allow multi-markets fast access, and to support, in the same configuration, data aggregation and management, risk analytics, alpha trading strategies and compliance needs.

One of the first, and main, drivers of EMS success was the attempt to avoid market fragmentation and its negative effect on market liquidity and best execution, as well as to offer a solution to the sharp increase in the complexity of markets protocols. The uptake is growing, but the reasons are changing. Recent research by Greenwich Associates said that buyside firms spent over US$1 billion on OMS and EMS in 2018, primarily driven by fixed income desks where EMSs did not exist previously, and where significant voice execution still exists. This is a huge amount of money and represents a clear trend in financial markets and indicates the growing strategic impact that EMSs can bring.

The implementation of MiFID II also plays a role in the demand for additional services, with buyside firms under the combined and increasing pressure of regulators, tighter margins and cost cutting. Regulations – particularly those concerning trade and transaction reporting requirements, and increased operational compliance – are causing buyside firms to reassess the systems and procedures they have in place. Tighter capital constraints on financial participants increase the demand for a ‘one-stop shop’ single solution, providing greater operational efficiency, risk management, reporting, analysis and audit tools all-in. To be compliant with MiFID II represents the new battleground in the competition to develop the most effective EMS.

There are still issues affecting the EMS space – such as the lack of accessible data or technological hurdles – but things are changing. The emergence of new assets, the increasing breadth and variety of customer demand, portfolio diversification, and competition between new entrants and new fintech solutions are all driving the emergence of new solutions.

Two possible solutions which can be adopted by the buyside are:

• An internal EMS solution: this solution is available only for firms that have the resources to not only build the EMS but develop the necessary in-house trading technology in order to implement changes in reaction to market developments or requests for new functionality.
• A third-party, outsourced EMS solution: the advantage of this solution is flexibility and scalability. Technological upgrades, and ongoing integration with multiple platforms and markets, can all be supported.

In today’s cost-cutting environment, such is the expense of continuous maintenance and development, that the outsourced option is looking much more attractive.

One major trend, that we are currently active in, is the acquisition of external EMS solutions by financial counterparties, as is happening in the fintech space. The acquisition of Charles River by State Street Global Advisors and of Triton by Virtu Financial have been pursued with the aim to complete their commercial proposition, leverage their financial markets strength and compete with BlackRock’s Aladdin.

One of the new elements introduced into EMS frameworks is the opening-up of a chat function, fully embedded to negotiate on a bilateral basis in competition with multiple automated RFQs and to monitor the voice-executed flow together with electronic flow.

The significant change in the fixed income markets that has accompanied electronification is the rise of non-traditional liquidity providers – which currently hold the majority of bonds – to take on a more central role in the formation of prices. This change was accompanied, and accelerated, by the migration of technology from the sellside to the buyside – specifically with regard to price-engines – and by the new reality associated with price discovery and price formation, which are particularly challenging for block-size trading as sellside inventories are shrinking. Several EMS solutions allow buyside traders access to market-making functionalities, trading strategy and arbitrage logics.

Since its inception as a quality-of-service tool, designed to enhance client relationships and prove best execution under MiFID, TCA functionality has increased both in its distribution and technology. While TCA tools are widely used in other asset classes, in the fixed income marketplace it is still a relatively recent phenomenon, encouraged by the increasing amount of pre- and post-trade data which started to become available after January 2018. The increasing sophistication of an EMS is facilitating the progress of embedded TCA systems. If traders can have access to real-time counterparty breakdowns in the EMS, this can rank brokers and ensure the highest possible quality of the execution while minimising costs.

In this new landscape, many buyside desks are wrestling with the decision whether to keep the OMS and EMS as two separate best-of-breed systems, or switch to a single unified platform known as the OEMS.

The new OEMS framework can play a significant role as a privileged gateway for sellside versus buyside and for buyside versus sellside and markets/platforms, to create a first global financial network link. On one side, the sellside needs to interact with buyside EMSs more and more frequently, while on the other side EMSs can provide the buyside with the tools to successfully access market liquidity and execution services, and to measure sellside performance, with the aim to achieve best execution for the end users.

©Best Execution 2019
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