Shifts in market structure drive investors to consider changes to trading desk technology
Changes in market structure are prompting institutional investors to consider the potential expensive and disruptive step of changing the technology that services their trading desks.
A new report from Greenwich Associates, Fixed-Income Desks Lead Increase in Tech Spend, Likelihood to Change OMS/EMS Providers, reveals that 30 per cent 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 per cent) than hedge funds (29 per cent).
Among investor types, fixed-income investors (39 per cent) are most likely to explore new systems.
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.
“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,” says 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.”
The new derivatives rules in the US and Europe and the increasing integration of asset classes and investment strategies are fuelling demand for a combined OMS/EMS platform. A significant two-thirds of the institutions participating in this recent study indicate a preference for an integrated OEMS, including three-quarters of hedge funds. However, only 11 per cent 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,” says Greenwich Associates institutional analyst Kevin Kozlowski.