Brokers Rethink Execution

Terry Flanagan

Execution management systems are frequently measured by performance, such as latency, speed and throughput, but the proliferation of trading venues around the globe means that execution can’t be defined by performance alone.

In a white paper, trading system provider Fidessa says that brokers need to connect the execution layer to whatever differentiators they have sitting higher up the chain, such as algorithms. Ultimately, the point of an execution layer is to enable brokers to effectively deploy their own competitive services.

“We’ve spent a lot of time in the financial markets talking about performance, whether it’s latency, throughput or capacity, as the most important feature of execution,” David Polen, global head of electronic execution at Fidessa, told Markets Media. “We’re now saying that there is a real desire to look across all the different things that the execution desk needs to do well, which includes things like risk, giving clients a single set of rules of engagement, and a single FIX specification that allows that client to trade across all the markets in the world without having to understand the nuances of each market.”

The issue of global reach is often neglected in the discussion about execution. In Europe, for example, there were 175 markets registered at the end of 2007, and this has risen to 280 today, according to the Fidessa paper. Including the 60 or so markets that have come and gone in between, that’s more than 160 new venues.

Additionally, each venue typically makes one to two mandatory upgrades a year, which need to be incorporated into execution systems. “You take those 280 markets in Europe and you assume that they’re doing one to two upgrades a year, and you’re sitting there looking at maybe 560 upgrades that you’ll have to do for European markets alone,” said Polen.

Polen tells of a large Chicago-based hedge fund that uses its own execution system for trading in the U.S., and is very satisfied with it, but uses its broker’s execution globally. “Their real complaint is not about performance but consistency,” he said. “When you look at the needs of the execution desk, simply raising performance isn’t enough anymore.”

He added, “No one’s putting down performance or saying it isn’t critical, and it always comes up in the conversation and it’s always something that the buy side wants and the broker wants. But in addition they’re also saying. ‘Tell me about your operational consistency, tell me about your infrastructure consistency, tell me about your market microstructure and how you normalize the markets.’”

For buy side trading desks, the real value comes from deciding what to trade, where, when and how, not in understanding the subtleties of each market interface. Traders should be able to send whatever orders they need to whichever markets they want without having to worry about which order types those markets support.

“If you’re a global bank, you need to provide a consistent service out to your buy side clients,” Polen said. “You need to make things as easy as possible for them to trade anywhere in the world: “Here’s my specification, code to it once, connect to me once, everything’s taken care of.’ That’s a very powerful message because you just reduced the cost to that buy side tremendously.”

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