Execution Management Systems

National-security analyst Gregory Treverton is known for making a distinction between puzzles and mysteries. As an intelligence analyst during World War II, Treverton employed the unique analogy to rationalize the fundamental shift required in the approach to intelligence-gathering. Instead of continuing to struggle to uncover missing information (the key to solving a puzzle), the analyst argued that the playing field had changed and now required focus on sifting through and analyzing readily available data (imperative for solving a mystery). Asset management firms are facing a similar shift when evaluating their current equity trading processes.

At one time traders struggled to locate off-exchange liquidity sources and collect market data; or put another way, they labored to solve a puzzle. Effectively trading equities and other liquid securities like foreign currency in today’s marketplace more closely resembles the task of solving a mystery, as market data and connectivity are commodities for today’s trading desks. And yet, while market connectivity and the free flow of information has become a given in the equity trading world today, the tools employed to analyze and leverage this data have not been integrated into trader’s order management systems ("OMS"). Enter execution management systems ("EMS").

EMS were once strictly employed by sell-side proprietary trading desks and quantitative hedge funds. Both looked to leverage EMS' strong program trading functionality and direct market access links to trade with more immediacy than other market participants. But today’s buy-side investment manager is beginning to evaluate these systems in an effort to support the increase in equity trading volume, to provide required access to fractured capital markets, and to facilitate the more robust analytical trading platform that OMS have historically failed to provide. Leading execution management systems are currently providing cutting–edge trading functionality that the buy-side is eager to employ through a single, low latency platform. Specific functionality includes:

Algorithms
EMS support a broad range of algorithmic strategies, from broker and third-party providers in a similar fashion to today’s OMS. Where EMS systems separate themselves is in the ability to support white box trade strategy development. White boxes provide a starter kit of strategy tools (ex. VWAP, Implementation shortfall) that firms can modify to suit their requirements and deploy to their traders. Some EMS also offer back-testing facilities where algorithmic strategies can be run versus historical tick data as well.

Real Time Pricing and System Performance
OMS providers have long supported real-time pricing updates in their blotters, but most investment management firms have chosen not to implement this functionality as OMS have continued to struggle with system performance issues without the added data volume. EMS platforms employ more performance-oriented technology, such as event stream processing to allow systems to handle higher and more current streams of market data, and, more importantly, to act upon it.

Transaction Cost Analysis ("TCA")
Transaction cost analysis has become an integral step in the execution process as a result of the buy-side’s shrinking margins and more automated approach to trading. EMS vendors are now at the forefront of making TCA a more real-time function as a result of their rich data environments. EMS are providing tools to support pre-trade cost estimation and intra-trade analytics, in addition to supporting broker and third-party TCA functionality.

Direct Market Access ("DMA")
At the core of today’s EMS is the ability to connect to equity, futures and options, and foreign currency markets electronically. Most investment managers employ FIX connections to the broker community via their OMS and to disparate DMA connections such as Lava. In addition to those standard functions, EMS provide direct market connectivity in the exchange's native language and have shown the ability and desire to stay current with changing market structure. EMS vendors are currently expanding the reach of their DMA connections to include extensive international market coverage, especially in continental Europe.

Program Trading
Many EMS systems were originally designed to support advanced program or portfolio trading techniques. Years of use by quantitative trading desks and hedge fund users has allowed the systems to mature and support complex trading techniques, including pegging, wave optimization, smart-order routing, and automated alerts.

• Advanced program trading systems may not be a fit for all firms, such as a buy and hold, single-stock oriented trading desks.
• EMS can be expensive and inherently difficult to support due to their customizable interfaces and toolkits. Advanced features of these applications are not typically ready out-of-the-box.
• Integration between EMS and OMS is typically performed using the FIX protocol today. While automated, the latency and limitations of this type of integration does not provide the tight link to core operating systems that most investment managers will require. Rolling these systems out to a large number of users is unlikely without a more robust, direct integration with the OMS.