A new generation of Order Management Systems (OMSs) that provide automated trading and integrated portfolio suites with improved trade functionality is increasing the number of affordable options available on the market. New vendors and applications mean cost no longer will hamper electronic access.
Vendors of portfolio management and accounting suites - such as Advent, DST International, SS&C Technologies, INDATA, SunGard and Linedata Services - have enhanced their trading suites across features and functionalities. Portfolio system suite vendors - while quick to launch trading capabilities - lagged on providing screen displays, external connectivity and compliance features that asset managers needed. But the new wave of applications is providing more of these features. And trading modules that often were available only alongside a vendor's accounting solution now are offered as stand-alone components.
Full trading suites include portfolio modeling, trade blotter, and pre- and post-trade compliance. Some new alternatives - such as New York-based Advanced Financial Applications Impact Pro product - offer a basic trade blotter with execution capability. Outside the realm of full suites, firms such as Reuters and Bloomberg are offering trade counterparty connectivity services, including algorithmic trading.
The enhancements made to these trading applications provide an alternative to independent trade solution vendors, such as Charles River Development, Macgregor, Latent Zero and Eze Castle Software, and focus on a different audience - small to medium-size asset managers. As prices decline due to the saturation at the top end of the market and more affordable deployment options such as application service provider (ASP)-based offerings become available, the opportunity to automate is in reach for smaller players.
The intermediary market will provide automation in broad strokes across the industry. One recent example is the deal between Linedata Services and UBS Prime Brokerage. As part of this deal, Linedata's Longview Trading system will be offered as an ASP to hedge fund clients of UBS Prime Brokerage. In one stroke, more than 100 hedge funds will have access to Longview.
While portfolio system vendors' product development efforts are providing a genuine alternative in the market, a new wave of applications from Tradeware, Portware, Bloomberg, Reuters and European-based vendors such as TradingScreen also are increasing the options available to asset managers. These solutions mark an improvement over products available in the 1990s that were expensive and often difficult to implement and maintain. Only the largest financial firms could justify the expense. But vendors now are targeting new entrants, such as hedge funds and smaller firms, with new functionality and lower prices.
Portware and FlexTrade are focusing on hedge funds with solutions that allow users to customize quantitative trading strategies alongside traditional risk arbitrage and long/short strategies. Beauchamp Financial Technology, SS&C Technologies and Eze Castle also have a significant presence in the hedge fund community due to their focus on derivatives. Meanwhile, sell-side vendors are tailoring products for the buy side. One example is Paris-based GL Trade's new buy-side solution, GL Winway.
The growing variety of automated trade options will result in downward price pressures on full trading systems. As the market for high-priced custom implementations becomes saturated, vendors will shift downstream, especially to the midtier market of asset managers with $10 billion to $50 billion in assets under management.
The major independent players - Charles River, Macgregor and Latent Zero - will feel pressured to lower prices. The leading vendors will find themselves head to head with a variety of portfolio system suite providers. The attractiveness of the full suite option also will lead independent trade order management vendors to pursue partnerships, mergers and acquisitions.
The growing number of options available in the marketplace means cost no longer will hamper electronic access; more players will be able to afford electronic access to the securities markets, and integrated trading and portfolio management system suites will be critical enablers of broader access going forward. The integrated model will be most appealing to managers with $10 billion to $49.9 billion in assets under management, and total market spending for trading systems - which was $445 million as of year-end 2004 - will reach $701 million in 2007, predicts Celent.
The next wave of applications will help transform straight-through processing from concept to reality. Increased electronic access will give rise to the greater automation of trade processing, fostering a more-level playing field and reducing trade errors.
Denise Valentine is an analyst with Celent's securities and investments group in the firm's New York office. Valentine's research focuses on asset management, hedge funds, portfolio systems, analytics and risk management. She has more than 15 years experience in the financial services industry. Before joining Celent, Valentine was a business risk manager at GE Capital Services. She also held positions at Oppenheimer Capital and Kidder Peabody Asset Management.