TELLEFSEN AND COMPANY, L.L.C.
Execution Management Systems and
Order Management Systems
– Evolution and Growth
December 2010
Proprietary and Confidential
Table of Contents
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Background
Evolution of OMS and EMS
EMS Functionality
Potential EMS Market Segment and Focus
Conclusions
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Background
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Order Management Systems (OMS) have been utilized by both
buy-side and sell-side firms since the early 1990s.
Execution Management Systems (EMS) came to market as traders
needed more specialized OMS technologies to support the
enormous amounts of data and market data traffic with negligible
latency.
As a result of market fragmentation following the introduction of
S.E.C. Regulation NMS (Reg. NMS), there are more trading
destination choices for traders to choose from (Internalization
engines, DMA, dark pools, exchanges, ECNs etc.)
A heavy reliance on EMS systems has evolved to support morecomplex trading strategies, high-frequency trading (HFT), intraday arbitrage strategies, as fast moving markets and razor-thin
spreads make it impossible to do this manually.
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Evolution of OMS and EMS
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OMS systems have been used by buy-side and sell-side firms to
document trades, re-balance portfolios, conduct pre-trade
compliance and post-trade allocations.
OMS systems continue to be the cornerstone of investment
management firms’ front office infrastructure.
OMS have been tightly integrated into the investment decision
making, trading, compliance and post-trade processes.
There have been workflow issues that require the use /migration
to EMS:
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No straight-through-processing (STP) capabilities
No interfaces to post-trade systems and vendors
Messaging latency issues
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Evolution of OMS and EMS (Cont’d) …
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EMS solutions - differentiators:
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Smart order routing
Depth of their infrastructure/connectivity to many trading destinations
Proximity hosting/co-location capabilities
Integrated market data and real-time pricing
Pre-trade transaction cost analysis
Custom algorithms
Commission management
Post-trade allocations
EMS systems continue to evolve their offerings and there is a
growing demand from buy-side firms.
EMS providers today are either broker-owned or independent
software vendors(ISVs).
In the last few years, there has been consolidation among EMS
providers and more is expected (i.e., market share).
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EMS Functionality
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EMS systems typically support U.S. listed and NASDAQ equities
and U.S. equity options
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Other asset class differentiators can include support for futures, fixed income
and foreign exchange products
Major features and functional differentiators can include:
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Integrated depth of book functionality
Single order and program trading capabilities
Spread trading functionality
Smart order routing
Direct Market Access (DMA) connectivity/ low latency messaging
Intra-day position management
Order staging blotter
Access to multiple algorithms
Integrated best bid-best offer capabilities
Risk management functionality
Real time charting and news
Post-trade allocations
P&L calculators
Straight-through-processing
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Potential OMS / EMS
Market Segment and Focus
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Traditional asset managers will use an OMS to take advantage of
broader trade support (portfolio staging, compliance and posttrade support).
Asset managers that trade infrequently are less concerned with
speed of execution and will be well-served by OMS systems.
Active asset managers that engage in basket trading, spread
trading and pairs trading and require cross asset class trading
capabilities will likely implement one or more EMS systems.
Mid-size or large asset managers will likely deploy one or more
EMS to placate traders with individual preferences, access to
broader span of broker liquidity.
Small hedge funds are more likely to use an EMS for the need for
a fast execution.
Large hedge funds will likely deploy multiple EMS offerings, as well
as an OMS.
Firm culture and EMS product offering nuances will influence EMS
selection / trading software strategies.
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Conclusions
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EMS offerings continue to evolve and there is a growing demand
from the buy-side.
As of June 2009, ~20% of EMS client firms were traditional buyside firms and ~80% were hedge funds, broker-dealers and
proprietary trading firms.
Global expansion by buy-side and sell-side firms into Latin America
and Asian markets will drag these solutions into those markets.
A more robust, well-integrated EMS-OMS hybrid will evolve.
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For More Information
Please contact:
John Rapa
President / CEO
Tellefsen and Company, L.L.C.
jjr@tellefsen.com
1-212 809 3800
Tellefsen and Company, L.L.C.
Proprietary and Confidential