The Gateway to Algorithmic and Automated Trading

Ready for Take-off?

Published in Automated Trader Magazine Issue 09 Q2 2008

Are todays order and execution management systems capable of guiding buy-side dealers through an increasingly complex trading environment or will new hybrid solutions emerge? AT asks leading providers to share their views.

  • With:
  • Stuart Breslow, CEO, Townsend Analytics
  • William F Cronin, Managing Director, Knight Capital Group, Inc.
  • Jeff Gavin, Product Development Manager, Eze Castle
  • Alex Lamb, SVP Business Development, RTS Realtime Systems, Inc.
  • Dan Watkins, CEO, North America, Fidessa LatentZero

Ready for Take Off

What new functionality developments are your clients most interested in?

Breslow: The ability to trade globally with multiple brokers across multiple asset classes from a single integrated platform is gaining a lot of traction. Clients want to be confident that the full breadth of features and functionality for each individual asset class is seamlessly offered within these multi-asset platforms.

What clients are most interested in is having broad access to liquidity and the ability to trade across multiple asset classes in a broker-neutral, agency-only environment. Clients recognise that a strong EMS must also have grounding in the microstructure of today's fragmented marketplace, which means it must provide unconflicted access to as many viable pools of liquidity as possible. Anything we can do to support clients in their objective to create alpha in the trading process is where we need to concentrate our energies as it relates to new functionality.

Gavin: Most of our clients have been asking for desktop consolidation, i.e. the ability to drive all functionality across asset classes from one system. Clients want a streamlined workflow for portfolio management, compliance, trading (including execution management) and operations functionality across the asset classes they trade. With a unified front-end that includes both an OMS (order management system) and an EMS (execution management system), the client can access all the trading tools and information they need, whether it's delivering execution tools or integrating with other third-party systems.

Lamb: In today's competitive, low-latency trading environment, traders increasingly require real, accurate evidence on transaction execution, i.e. microsecond stamping to verify own metrics and performance. Speed of trading also underpins another key requirement, namely the seamless integration of APIs (application programming interfaces) into trading tools.

Watkins: There is no single answer as it depends on who the client is, i.e. portfolio manager or trader, and the asset class that they trade. The principle value in being a customer of a vendor is the value of community and the shared push forward of the industry. The only constant in integrated trading and execution management is change. Existing algorithms change, new platforms arrive and there is constant pressure for all of this to be provided sooner. At a high level, current demands are in the areas of combined OMS/EMS and over-the-counter (OTC) derivatives.

Jeff Gavin,Eze Castle
Jeff Gavin,Eze Castle

"Many OMSs are re-architecting their systems with a more service- oriented approach."

What software innovations are driving performance and functionality improvement among OMSs and EMSs?

Breslow: Software innovations aren't necessarily the primary drivers of performance and functionality improvements, client demand is! The market data explosion, which presents both the obvious risks as well as rewards to those best equipped, is driving performance improvements as is market fragmentation and overall volume increases from electronic trading. Automatic order handling and market centre preferencing are in high demand as are OTC product trading, tradable indications of interest (IOIs) and post-trade servicing workflow solutions.

Cronin: Technology that enables an EMS to scale quickly in relation to heavy trading volume is crucial, particularly against a backdrop of the spikes in market volatility we've witnessed over the past year. Beyond that, it's incumbent upon the skills of an EMS provider's quantitative staff to parse through and analyse massive amounts of trade and market data to guide development of new algorithmic strategies that deliver a value proposition, as well as addressing regulatory requirements.

Gavin: Architecture changes have been pivotal in driving performance and functionality. Many OMSs are re-architecting their systems with a more service-oriented approach. The architecture is instrumental in delivering embedded EMS functionality - it is what enables global DMA (direct market access) and other execution tools to be directly embedded into the OMS without adding latency.

Watkins: This is simply a question of using the correct technical architecture. Most of the OMS industry is still running on the wrong architecture for a high-volume trading system. A traditional 2-tier or even flat service-oriented architecture is not sufficient. An event-driven architecture is required. With today's transaction and market data volumes, resulting from the increased use of algorithmic trading and DMA, the pressure is on the OMS to handle a high level of capacity and throughput. For example, volumes at our larger clients have increased between five and tenfold in the last five years, with some clients regularly processing 20,000 orders and 200,000 fills in a day. Constant investment in the software to keep up with these demands is essential.

Is a combined OEMS (order and execution management system) inevitable and can it be readily built from existing OMS or EMS offerings?

Breslow: I think there's already plenty of evidence of a blurring of the product/service lines. We expect this 'best of breed' evolution to continue as a natural progression in the OMS/EMS space.

Cronin: They're separate applications with distinctly different purposes. It's unlikely that one or the other can serve the client as an all-in-one solution, largely because of the architecture and purpose of each system type. We all want simplicity, which means everything on one screen. However, we have noticed that proactive clients are seeking best of breed in whatever tools they're using. In an environment where these tools interact well together - through staging and FIX for example - you can have best of breed with a very smooth workflow without sacrificing certain functionality.

Gavin: Many of the major players already have combined systems and offer them today (we released our single-system solution in June 2007). Few, if any, of the existing OMS and EMS vendors were equipped to quickly build out a combined system from scratch, which is why we've seen consolidation between vendors.

Alex Lamb, RTS Realtime Systems, Inc.
Alex Lamb, RTS Realtime Systems, Inc.

"… trying to combine separate existing offerings into one OEMS involves significant friction and costs."

Lamb: Yes, a combined OEMS is inevitable. However, trying to combine separate existing offerings into one OEMS involves significant friction and costs. To reduce latency and maximise throughput, the EMS needs to be seamlessly integrated into the OMS, at various functionality levels. An OMS could then be used as a low-latency single-standard converter to multiple markets for market data as well as order routing. Within an effective OEMS, the OMS component has to be able to access and leverage EMS data and vice versa.

We believe a combined OEMS is what the buy-side trader wants, and certainly we are currently being asked by both clients and prospects to demonstrate our capabilities in this area. We are seeing other vendors in the EMS space trying to get into the OMS space. Many OMS vendors do not have the underlying technology necessary to be able to handle the levels of capacity and throughput required for high-volume EMS functions, which makes it difficult for them to move into the EMS space. On the other hand, it would be a massive venture for an EMS vendor to build the comprehensive functionality that exists within an OMS into its EMS. OMS vendors with the right technology are best placed to provide an integrated OEMS.

What can banks and vendors do to improve the integration process for banks' execution algorithms?

Breslow: Beyond better servicing of banks by the vendor community, key improvements would also include a set of standardised, scalable electronic integration tools to reduce development overheads and time-to-market associated with the onboarding process. The concept behind FIXatdl (algorithmic trading definition language) is promising, but it's still in the extremely early stages of the adoption process.

EMS systems are the centerpiece of innovation in the evolving world of algorithmic trading. Development of new generations of algorithms won't be led by the OMS, but rather within the driver's seat of where electronic trading is conducted: the EMS. Developing and maintaining these systems is difficult and expensive work. Some firms are increasingly turning to outside providers, as they're discovering that the task of keeping up with the technology, higher volumes of data and changing regulatory requirements is not their core competency.

Vendors must realise that the rate of innovation in algorithmic trading outpaces new OMS releases and, as such, they need an integration approach that makes it easy for our clients to get the latest algo offerings without having to upgrade. The key to fast and efficient integration is to decouple the two processes to deploy new and enhanced algorithms to clients on demand and transparently.

There needs to be a balance between speed of deployment and usability. The optimum scenario is to deploy the algorithms within vendor tools, while allowing the customer to modify and tune them, based on trading experience. From an industry standards perspective, the FIXatdl initiative looks likely to streamline this process.

Watkins: This is something we are constantly trying to streamline. An open XML-based approach that uses standards means no software change is required when new algorithms are released. It is then a question of streamlining the scripts that upgrade configuration and the testing and recertification before new algorithms can go live. In working with banks, the sheer volume of certification means that time lag and booking test facilities often creates a delay of weeks or even months to run a few hours of testing.

Stuart Breslow,Townsend Analytics
Stuart Breslow,Townsend Analytics

"… the next generation of algorithms will be increasingly susceptible to operational risk in environments ill-equipped to accommodate them."

What challenges do the next generation of execution algorithms present to OMS/EMS providers?

Breslow: As execution algorithms incorporate more varied sources of decision-making content while the demand for even lower latency and higher availability of content increases, the next generation of algorithms will be increasingly susceptible to operational risk in environments ill-equipped to accommodate them.

From the broadest perspective, MiFID and Reg NMS are intended to drive market efficiencies; the proliferation of electronic trading is a clear by-product of these mandates. Algorithms and the EMS are primary enablers of electronic trading that help clients minimise market impact and execute as efficiently as possible.

It depends on the integration process and architecture in place. Some OMS vendors have already integrated both smart order routing and intelligent/adaptive algorithms. The challenge for vendors is creating a flexible framework that can scale with the advancement and innovation of execution algorithms. Additionally, OMS/EMS providers must support the high volume of FIX messages that are required with some of the most innovative algos. The incorporation of service-component architecture provides the infrastructure to handle this.

Exceptions to the rules will occur, particularly when, as recently, market volatility is high. As such, the ability to use 'intelligence' to identify aberrations, while avoiding over-complication, will be an important requirement.

Watkins: We believe that having the right open technology platform means that new developments can be integrated with the minimum of impact to the existing platform. This allows the vendor to concentrate on the added value of these new ideas and how to closely integrate them with the OMS. Clearly, an OEMS that has knowledge of all orders allows much more potential than a staged order workflow, where orders must be moved before being candidates for intelligent order placement.

What additional requirements are placed on OMSs and EMSs by growth of multi- and cross-asset trading?

Breslow: In cross-asset class systems, the configurability and complexity of the system places even more emphasis on and attention to the data you need to look at and when you need to look at it. Much more work is required to implement a scalable, multi-asset solution into the trading platform.

Gavin: Flexibility. Today, many investment firms, both traditional and alternative, are trading in multiple asset classes. For OMSs and EMSs the challenge has become twofold; to provide flexible functionality; and a streamlined workflow for all asset classes. Historically, systems were specialised to support a specific asset class. Today, not only are individual firms unique in their investment styles, but the instruments being traded have also grown in number and complexity. Each asset class has a unique lifecycle and thus requires specific calculations, workflows and data sets. To support this diversity, the system needs to provide flexible workflows that support the unique attributes of the different asset classes. Additionally, the system should offer analytics for decision support during order creation as well as proper exposure calculations across asset classes to enhance risk management.

Multi-asset trading demands not only that systems handle more market data, but must also help the trader deal in multiple markets effectively. Important functionality includes the ability to digest or parse vast volumes of market data intelligently, and to identify leaders from laggards in terms of order execution. This last requirement is critical if execution risk is to be managed on what are intrinsically more complex trades than are common today.

Historically it was possible for an OMS to be successful as simply an equity system. But no longer. It is essential to be able to handle a complete range of asset classes including fixed income, currency and derivatives. The OMS functionality required to handle all asset classes is very significant and probably requires in excess of 100 man years of work just to add to an 'equity-only' OMS. In the EMS space, there are many trading venues for different asset classes, from TradeWeb and MarketAxess to FX Connect and FXall. It will take a considerable time before one vendor could conceivably provide a single OEMS with execution for all asset classes, meaning that the realistic solution for the time being is one of an integrated execution for equities and staged connection to EMSs for other asset classes.

Dan Watkins,Fidessa LatentZero
Dan Watkins,Fidessa LatentZero

"It will take a considerable time before one vendor could conceivably provide a single OEMS with execution for all asset classes, …"

Bearing in mind the past throughput problems of some OMSs/EMSs, what are vendors doing to handle the continuing rise in volumes of orders/market data?

Breslow: Any means of reducing latency in trade data delivery and display is key. Increasingly, headroom capacity and geographical co-location in the face of exploding data volumes are two essential components to improving performance. The best vendors in the OMS/EMS space are investing heavily to deliver low latency and scalable market data that accommodate market data capacity to their users and can accommodate the growth in data rates without a direct proportional investment in hardware. Smaller vendors that secure these services from larger ones face extinction.

Cronin: Serving the execution side of the financial markets in a dynamic, changing environment is an enormous undertaking. There's higher message traffic and an increasing number of orders (cancel/replace) to contend with. Having scalability and an architecture that remains robust is key.

Gavin: OMS vendors are re-architecting their offerings by leveraging SOA (service-oriented architecture) that enables the OMS to become more flexible and scalable, thus decreasing potential bottlenecks down the road. We're seeing this transition to more flexible and scalable architectures across the industry. Many firms are looking to leverage new technology and architecture to handle the growing demand for more advanced technologies coupled with rising volumes of orders and market data.

Lamb: When the trader is receiving so much data from so many sources, he has to be able to make some hard choices on what's actually important to him. Systems should allow the user to view only the essential and exclude the non-essential. Selective market analysis is required to narrow information flows to significant data rather than noise. This will also reduce poorly-delivered orders and failed execution situations.

Watkins: Constant investment in technology improvement is required to address future expected volumes. For example, our EMS works on a separate hosted infrastructure to avoid being dependent on the customers infrastructure and to avoid conflict with the existing OMS. Customers will be operating with hundreds of thousands of orders and millions of executions per day in the next three to five years, and vendors need to have the right architecture in place to handle this if they are to keep up with market demands.

What tools do you expect to see on the buy-side trader's desktop in five years' time?

William F Cronin,Knight Capital Group,Inc.
William F Cronin,Knight Capital Group,Inc.

"Serving the execution side of the financial markets in a dynamic, changing environment is an enormous undertaking."

Breslow: As well as an OMS, I expect there to be a multi-broker EMS which includes market monitoring analytics and a robust commission management system.

Cronin: With both volatility and volumes on a seemingly unabated and upward trajectory, traders have more to do and are looking for tools that will simplify the more mundane yet time-consuming aspects of their job. Algorithms are very good at automating repetitive and tedious tasks and managing multiple trades at the same time, but they can't think or exercise trading judgment; that's where a trader flexes their skill. Today, as in five years' time, a trader looks for tools that provide electronic efficiencies to routine aspects of the trading process, freeing time for their human capital to facilitate and complete more complex transactions.

Gavin: We expect to continue to see the consolidation of desktop tools, both through mergers and the incorporation of more functionality into existing systems. As the hub of the trading desktop, the OMS is positioned to become the central place for consolidation. Years ago, OMS vendors expanded their offering from order entry and management to include portfolio management and compliance tools. Embedded EMS functionality was the next natural step in the evolution. Over the next few years you'll see the incorporation of more risk functionality and streamlined access to liquidity. But, even as investment firms consolidate the number of systems on the desktop they'll continue to want the power of choice, to decide what tools they use and who they trade with.

Lamb: Traders will be using tools that reflect their increased ownership of the trade execution process and therefore their need to understand the big picture. This means broker-neutral automated and algorithmic trading tools that enable the buy side to code, test and deploy their own algorithms, as well as tools that present market information as a set of achievable objectives.

Watkins: We expect to see constant innovation from liquidity venues and brokers and that the OEMS will have to continue to interact with the systems that the buy-side trader wants. We also expect to see a move to fewer systems as functional competition and the move to multi-broker or truly broker-neutral solutions kills off single-dealer platforms.