Buy Side Seeks EMS/OMS Revamp

Terry Flanagan

Changes in market structure are prompting institutional investors to consider the potentially expensive and disruptive step of changing the technology that services their trading desks.

A report by Greenwich Associates reveals that 30% of the head traders interviewed at 486 buy-side institutions say their firms are considering a change in the providers of their order management systems (OMS) or execution management systems (EMS). Across institution types, the trend is stronger among investment managers (35%) than hedge funds (29%). Among investor types, fixed-income investors (39%) are most likely to explore new systems.

“Regulations are reshaping the way fixed-income derivatives are traded and cash markets face a major evolutionary step with the buy side now holding the majority of the inventory and, therefore, the power,” said Kevin McPartland, head of Greenwich Associates Market Structure & Technology. “This is in large part why a significant amount of fixed-income investors plan to look for a new system in 2014.”

Several factors are driving the desire to evaluate current systems for potential change, including the need to keep pace with new regulations that are changing the market structure in derivatives and imposing new compliance demands across asset classes.

With the fixed-income market arguably undergoing the most change, buy-side investors in this asset class are both more likely to be looking into ways to improve systems and to be spending more on technology, according to the report.

The movement of the industry to integrated OEMS finds many buy-side institutions favoring OEMS, but few saying they currently use one—this in spite of several offerings in the marketplace and many institutions already using an OMS and EMS from the same provider.

While the increasing complexity of the market and rapid rate of regulatory change have no doubt increased demand for a powerful and efficient combined system, the transition to OEMS will continue to develop over a relatively long time horizon, said Greenwich Associates.

Although the perpetual search for an edge in seeking investment returns largely drives the need for new systems, alterations in market structure brought on by new regulations have become an equally significant driver. The impact of new regulations was clear among fixed-income desks which were more likely to report a year-on-year increase in desk budgets and a higher allocation of spend to technology as they adapt to the new fixed-income market environment.

The new derivatives rules in the U.S. and Europe and the increasing integration of asset classes and investment strategies are fueling demand for a combined OMS/EMS platform. A significant two-thirds of the institutions participating in the study indicate a preference for an integrated OEMS, including three-quarters of hedge funds. However, only 11% of the participating head traders say they currently employ an OEMS, indicating significant potential growth as integrated systems evolve.

“In both equity and fixed income, demand for comprehensive OEMS platforms is strongest among small and mid-sized institutions as a means of reducing costs, facilitating regulatory compliance and accessing liquidity,” said Greenwich Associates institutional analyst Kevin Kozlowski.

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