Most
asset managers have automated the trading and compliance function
through the deployment of an industry leading OMS. However,
with firms looking to trading to bolster their performance
and with regulators insisting on proving the client got best
execution, leading investment management firms are now planning
to deploy "heavy duty" analytic tools on their trading
desks to increase performance and accountability. These tools
will enable firms to trade better, faster, and in a more controlled
and transparent manner, but implementing these tools will
be a major challenge to the IT department in any investment
management firm.
Algorithmic Trading and Smart Order Routing
While most large managers already employ algorithmic trading
and smart order routing, they typically use the capabilities
offered by the sell side or outside services. Cutter's survey
of over 80 investment management organizations indicated
that traders overwhelmingly preferred algorithmic trading
capabilities to be proprietary and embedded in their own
OMS. Over the next five years more and more managers will
bring algorithmic trading and smart order routing in-house,
using their own, proprietary algorithms as well as those
provided by vendors. Investment management firms and vendors
will also develop methods for evaluating various algorithmic
trading and order routing models and for adapting models
to new market conditions.
Pre-Trade and Real Time Risk
Pre-trade risk management functionality will join pre-trade
compliance, so that portfolio managers and traders can see
the risk, as well as the compliance implications of their
orders and trades. This functionality will allow the managers
to allocate their risk, just as they now allocate their
holdings. Real-time risk will also enable traders to manage
their book to add minimum risk to that of the underlying
portfolio.
Trade Impact and Trade Evaluation
Soon standard practice among the leading managers will be
to include trade impact analysis as part of the portfolio
manager's decision process. This means that orders will
come to the trading desk with more explicit execution instructions,
which may cause some tension between traders and portfolio
managers. On the trading desk real-time trade impact and
trade evaluation capabilities will assist in executing orders.
Other Functionality
Other analytic tools will assist the trader on timing strategies,
price discovery, market depth, volatility analysis, and
trading costs. Over the last twenty years some have predicted,
in error, that expert systems will drastically change how
the trading desk operates. These projections will finally
begin to come true over the next few years, as traders turn
to rule-based systems to assist them in automatically handling
orders that would not benefit from active trading and in
prioritizing and presenting those that need the trader's
attention. Without such assistance traders will become bogged
down in the minutia that the new analytic systems will provide.
Migration
As noted above, trading-orienting functionality will migrate
over the next few years from outside the firm to the trader's
desk and even further on to the portfolio manager. The portfolio
management function will include information on trading
costs, price volatility, liquidity analysis, market depth
and implementation shortfall for each security and each
strategy. As portfolios are constructed and rebalanced,
logic that includes "smart rebalancing" and measures
potential market impact will become standard. Thus, before
trades are even submitted to the trading desk, they will
be optimized for trading costs.
Can the OMS Vendors Help?
Some OMS vendors will ignore these trends, become relegated
to the position of operational record keeper for the trading
function, and, we believe, eventually fail. Others will
see the opportunity inherent in the changes and attempt
to develop the required analytic functionality themselves.
In doing so, these vendors are "stepping into the ring"
with the likes of ITG, AES, Portware, Algorithmics, and
other successful analytic vendors. We do not think these
vendors will succeed.
The smart OMS vendors will acquire or establish partnerships
with analytic firms and provide integration between the
OMS and analytics. The really smart vendors will include
several top analytic systems in each functional area.
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