A case in point

The emerging EMS issue came to light, unsurprisingly but most informatively, at the TradeTechUSA 2007 equity trading conference held last month in New York. During a panel discussion on buy-side EMS optimisation, Stephen Berte, US equity trader at Standard Life Investments, explained his firm's motivations and experience in considering whether and how to implement such a system. Although each investment manager brings its own set of requirements to the table, I think Berte's concerns generally reflect those of other industry participants as vendors, brokers and consultants push yet another new type of technology upon them.

Berte said that after a six-month research process, Standard Life Investments has yet to implement an EMS, and is still assessing what its trading needs are and how an EMS could handle more difficult trades differently from an OMS.

"We use Charles River for our OMS right now, and it does a good job staging orders from our portfolio managers," Berte told the audience. "It probably does a good job for about 80% of our orders, but it does somewhat of a terrible job on 20% of the orders for which we need more finesse."

Berte identified a justifiable need for an EMS to handle the 20% of his orders his OMS could not support, but emphasised that only those products truly able to provide access to multiple brokers and execution venues would prove their value and enable traders to add alpha and minimise transaction costs.

"One of the key issues for me would be that an EMS is truly a multi-broker platform where I can access every broker, every ATS, and every destination I need to. I do not want to have to have two different EMSs – one for 60 or 65% of my orders and the other for the remaining 35 or 40%," Berte said. "It is difficult for me to pick a vendor who does not provide multi-broker capabilities in an EMS."

Broker-neutral, multiple-venue capabilities sound basic enough – defining characteristics and functionality that all EMS platforms should, at a minimum, possess. But that does not mean managers can assume various EMS developers vying for their attention have built such capabilities into their offerings. If we take Berte's testimony as a proxy for buy-side managers' EMS requirements in general, the connectivity these platforms provide to multiple execution venues will arguably prove their most crucial component for managers more actively running their trading operations.

Thus, managers shopping for EMS products should not take the connectivity issue for granted. The EMS marketplace has become highly varied; brokers, third-party developers and traditional buy-side technology providers are all actively selling or developing/rolling out offerings, and their approaches to underlying product architecture and connectivity show significant differences.

In short, the new-car analogy is apt enough: check under the hood before buying. Can an EMS developed by a sell-side vendor or broker truly provide broker-neutral market access? Can a buy-side technology vendor develop an EMS with functionality clearly distinct from its other offerings? I've read a lot about the coming increase in buy- side EMS adoption rates, but managers' concerns and questions will clearly need addressing before such expectations come to fruition.

Oh, and you had better kick the tyres, too. >