Chosing A Vendor EOMS For Program Trading
A question was recently posed “What do you think is the best broker-neutral EMS/OMS for sell-side program trading?” and continued “Especially interested in opinions on prepackaged algos, basket trading and specifically pairs trading abilities.” The answer would of course be a function of the requirements of the solicitor which they have kindly illustrated but of course everyone is different. The answer would also be a function of the responder. Don’t you think all software vendors would claim there’s is the best broker-neutral EMS/OMS for sell-side program trading?
Well in fact they do. Here’s an example of a typical software vendor making that claim. “ULLink is a leading provider of global connectivity and trading solutions for large, medium and niche financial institutions, both on the Buy Side and the Sell Side”. How truly comprehensive can these applications be from a firm that started with selling connectivity solutions? Don’t get me wrong I have nothing against ULLink but I needed an example of a vendor claiming they are the last word in trading technology. ULLink offers the APAMA Algorithmic Trading product which is developed in partnership with Progress Software and they even claim on their website “Ready-to-trade: it comes with a library of preset, industry-favorite algorithms.” 100% true but how can a software vendor understand how markets work? Sorry guys but I’m betting any dealer can outperform those algo’s.
How about “TradingScreen is a global provider of multi-asset class, multi-broker electronic trading solutions. Through its innovative products and services…” Having seen their product here in Asia I wasn’t so impressed. It was just another trading front end with a price feed a trading blotter and an order book. Their options screen was very unsatisfactory. It didn’t even offer a volatility surface. There is no need to continue to bash the software vendors. They all have their merits.
I think for best of breed algo’s I’d be more inclined to go with agency brokers whose survival depends on generating commission. We all know how easy it is for the fickle buy-side to trade away so any algo’s offered by an agency broker MUST perform. And for a front end offering a comprehensive Program Trading solution I would go with a tried and true vendor who is focusing on what they know. Software.
ITG’s algorithms come to mind. They have a comprehensive suite of algo’s that offer many sophisticated and complex trading algorithms (including pairs trading with FX hedging). For example, volatility is up as we can see in the spreads of most names. ITG’s algos have a historical spread component and if there algo has to cross the spread it considers the current spread before sending out a slice. I’ve seen algos cross obscene spreads just because the volume profile says it should. ITG also offers a list-based algo called Dynamic Implementation Shortfall. This Algo manages risk at the basket level rather than by name. It also allows cash and sector neutrality on executed baskets to minimize risk on the residual list. Another agency broker offering pairs trading worth mentioning is Instinet.
Let’s take a look at the leaders of the EMS and OMS program trading business — Portware, Charles River Development (CRD) and Fidessa. (I left out Sunguard as they have a brokerage arm.)
Fidessa’s BlueBox algorithm suite includes the generic VWAP, TWAP, POV and Arrival. They have most recently added Invisible, Price Improvement and Shadow. Invisible is equivalent to Credit Suisse’s Guerilla or Citigroups’ Wait and Pounce which have been on the market for a long time. Both Price Improvement and Shadow are passive pegging algorithms. Hardly, pack leading stuff.
Portware Strategy Server offers a different approach to algorithm trading “allowing users to create complex trading strategies and algorithms”. They have chosen the Complex Event Processing (CEP) approach (much like ULLink) that would afford more control when your algo should send a slice. The downside to this is that you may not have the time to back test as rigorously as the agency brokers who depend on algo performance.
Charles River Development doesn’t offer any algorithms. They instead focus on the other aspects of trading from “counterparty discovery, trade placement, execution, and allocation to downstream trade processing” Of course there are other considerations like connectivity. How many markets/ECNs/MTFs do these vendors connect to? Cost is just as important. Does the cost justify the quality of the software vendor tools? How about reporting tools like pre-trade and post trade analytics? Or risk management? Or compliance? Does the platform offer multi-asset capabilities? Well most claim but how well are these different asset classes integrated in the vendors platform? Different assets require different fields including pricing information or position keeping and a homogeneous screen simply will not suffice.
When it gets right down to it the choice of best broker-neutral EMS/OMS for sell-side program trading would depend on how good the fills reported to the buy-side are. But I would be inclined to short list agency broker algorithms coupled with independent software vendors with a long term history in the EMS/OMS space.
What is your opinion?