Can Systems Make a Good Trader

8/14/2019 Can Systems Make a Good Trader

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COMM E NTARY 74 JANUARY 2OO3CAN SYSIEMS MAKE A GOOD TRADER?--An Update on Desk Technology

Explosive growth in the equity markets over the past decade has led to the installation ofOrder Management Systems (OMS) on most desks. However, the industry is far from ma-ture. With new AIMR trade guidelines and T+1 looming, periodic reviews of system usagehelp desks plan for "the next phase." To gauge progress for Plexus clients toward an "ideal"seamless electronic path from idea to execution, we examined three aspects: electronicorder generation, order management systeps and FIX connectivity.

Key Findings:. Client commitment to integrated ordermanagement systems is strong and gettingstronger. The driving force is enhanced deskproductivity.. The vast majority of Plexus clients (80%) havehighly automated order generation processes.Automation level is independent of trade

volume, desk size, and total trade costs. While96% of Plexus clients use some form of OMS,not all have systems that link the desk with boththe PM's and the brokers.. Custom solutions remain popular with largevolrime ctients that have the scale to supportdevelopment and customization. Vendorselection criteria among larger desks focusedon scalability, asset coverage and connectivitywith brokers.. ln the past 2 years, 25% of surveyed clientshave switched OMS vendors. The impetus forchange has been comprehensive functionalityand improved connectivity.. FIX (Financial Information eXchange) usage haslittle middle ground as firms either embrace oreschew it. Technology may promise more thanit can deliver.

. System performance conclusions:o The key differential is that FIX enhances deproductivity;o A high level of "eyes shut" electronic tradindoes not compromise quality;o Electronic trading processes clear the deskthe chaff trades, permitting concentration odifficult orders; ando Despite the inroads of electronic tradintraders make good use of market makers f

the tough orders,o Desk value-added is not related to svstemusage overall.El ectro n i c O rd er G enerati o n

An important first step to an efTicient investmeprocess is timely delivery of orders to the desThe advantages of electronic transmission athat it [1] saves time, [2] reduces errors and [feeds directly into compliance and ordemanagement systems. About 80% of Plexuclients incorporate order automation from the Pto the desk. The remaining 20% of managerhave traditional paper ticket/phone processeWe did not find a significant cost differencbetween clients with and without well-integratesystems. But desks with good systems, howeveseemed much happier about it in terms of item[1] and [2] above.


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O rder M a n ag em e nt SysfemsAn order management system (OMS) is thecritical tool to managing the large flow of orderscrossing desks each quarter (median quarterlyorder load was 6600 orders.) OMS's come in allshapes and sizes, costs and capabilities. Wepresent two perspectives on OMS usage. The firstlooks at market share for systems according toactivity and style segmentation. The secondsummarizes characteristic and cost results for theOMS vendors.

O rder M a n ag em e nt SysfemMarket Share Analysis

billion. Surprisingly, they also showed the widestrange of FIX connectivity (from 5 to 75 brokers).MacGregor and custom systems also had largedollar volume characteristics and more consistentcapacity for broker connectivity. All three systemshandled the higher average trader configurationsassociated with the larger volume desks.Decalog had limited representation in the smallcap sector, but its clients sported the largestaverage trading volume at $2.4 Billion. CharlesRiver, EzeCastle, and Moxy showed the smallestaverage volume in both large cap and small capstrategies. Both Charles River and EzeCastle,however, had multiple times their averagepenetration within the higher mcmentr:m quartile"The lower average volumeamong these managers raises

the question of whether theOMS choice for thesemanagers was a cost issue orone of compatibility with front-end accounting systems.From an OMS perspective, wedid not see any distinctions byvendor for a superior costpicture. Manager and tradercosts were consistent witheach system's relative orderdifficulty. Charles River andEze-Castle clients, forexample, had higher adverse order momentumand consequently showed higher execution costs.Similarly, we saw no relationship between vendorand trader value-added. A good system canmake the desk more productive, but it will notreplace sound trading practices. What an OMSdoes provide is the information necessary fordetailed feedback on PM and trader practices.

Wiring It AII TogetherThe third leg of the electronic transaction processis FIX connectivity from the client OMS throughthe broker. With the tantalizing potential for near-instant order transmission, our initial assumptionwas more extensive usaqe. What we found was

Overall, MacGregor was the most popular systemwith 26% share. Custom systems were second at20%. Longview and Moxy both had mid teensrepresentation. When we looked at the 25 largestdesks, MacGregor dominated with a 36% share.Custom and Longview each had at least 20%.Among the least active desks, Moxy was the clearleader with a 32o/o share. Custom OMS systemshad the greatest relative share among the valuedesks reflecting their importance to the larger,more diversified stvle desks.OMS Vendor Ch aracteristics

Longview clients had the highest average tradingvolume. Their LC average of $10 billion morethan doubled the median manager total of $3.9

OrderMgmt.Svstem OverallTotal

25 MostActiveDesks

25 LeastDesks

Lrg CapMomentumDesks

Lrg CapValueDesks

Charles RiverCustomDecalogEzeCastleLongviewMacGregorMoxyOtherNone

4%20%4%9%14%26%14%5%4%

Ao/o20%4%0%

24%36%B%B%0%

40/20%0%8%B%16%32%4%8%

11%11%59.i

ZlTo217t26%5%a%0%

0%40%5%0%15%20%10%5%5%o

100o/o 100% 100% 140% 100%


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FIX usage grouped at the extremes. About a thirdof the desks employed low levels of FIX usage. Aslightly higher 40o/o of clients made extensive useof FIX connectivity for trading. When we lookedat most active/least active and large cap/smallcap groupings, the same usage pattern persistedwith about a third making little use of FIX andsomewhere over 40o/o making frequent use of thetechnology. Momentum clients proved to be theone exception, preferring direct access to brokersvia phone rather than working orders via FlX.Does FIX deliver the goods?

. Without question, the OMS/FlX combinationenhanceci cjesk productivity. The avei'aEenumber of orders is now over 9300 perquarter. When we look at quartiles of FIXusage, the distinctions are more striking.Low FIX (< 25%) users had average ordertotals of 4400 for the desk and 930 pertrader. Heavy FIX users were considerablymore active, handling nearly '12,000 orders,3X the flow of low FIX using desks.

. With respect to trade quality, the good newsis that a high level of "eyes shut" (automatedrouting) electronic trading does not com-promise trade quality. Clients achieved costsin line with PAEG/L for the basket of heavily"FlXed" trades. DOT orders were a few basispoints expensive while program resultslooked very sound.

These results point less to shortcomings ofFIX but rather to good judgments on thepart of traders as to which trades to handleelectronically. ln our "Market Maker in theAGE of the ECN"* we highlighted thecontinuing role for the highly skilled and well-connected broker. With B0% of trade dollars inorders requiring more than 1 day's volume,accessing liquidity remains the crucial issue.Electronic systems excel at siphoning offnormal volume in a very cost effective manner.Systems are much less effective, though, atcreating volume and Plexus clients still rely onmarket makers for this role.

Qualitative Commenfs On OMSAnd FIX SystemsAbout 25% of the respondents said that they hachanged OMS vendors or initiated a majupgrade cycle within the past two years. Givethe costs, complexity, required system resourceand transition length, we were somewhsurprised by the number of clients shiftinsystems. The two major reasons for change wedissatisfaction with existing vendor and needhandle global issues. Transition time ranged fro1 month to two years and counting. The mofrequent OMS addition was EzeCastle, which wopraise for short implementation time. Longviewas another multiple winner with kudos for comprehensive functionality. Dated technologplatforms like Predator showed the highenumber of defections.Comments on what works showed why tradebelieve OMS and FIX can make their jobs easiePopular features were rebalancing, organizatioand compliance. Shortcomings also related moto functions that might make their jobs easiersolving specific bottlenecks for individual des(currency, reports, step outs, etc.) Tradeseemed less focused on how these systems migcut costs.FIX survey respondents echoed Charles Dickewhen connectivity was cited as both the best aworst of factors. Among the connectivicomplainers, the break point seerned to be lethan 10 brokers. The second most importabenefit cited by clients was ease of usSurprisingly, only one client reported speed as tkey benefit. In the "what needs work" categorclients most often cited reliability.Conclusions: AII Wired UpBut Where to GO?

Electronic trading makes a fast connection, bdoes it get you where you need to go? Withoudoubt, technology plays a key role in expandinthe productivity of the desk. Among the ma


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productivity enhancing factors cited by clients arespeed, organizational facilities for traderspecialization, program development, allocation,error reduction, and improved indications of orderinterest. Systems free up time for traders to focuson the more difficult orders where they can addthe most value. We see dramatically higher orderlevels for desks using a combination of an OMSand FlX.Having said that however, many clients report thatOMS and FIX systems are works in progress.Once built, they immediately become legacysystems requiring significant maintenance andcustomization at the user level. The evidence forthe past year suggests that systems have notmade the average Plexus client better iraders.Clients have changed OMS vendors in pursuit ofgreater functionality. To reach fruition, thesesystems must develop greater flexibility foradjusting orders on the fly and smarter feedbackalgorithms to gauge the development of liquidityin relation to costs. Effective desks learn andadapt techniques to their own particular needs.*Available on line at www.plexusgroup.com

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@ 2002 Plexus Group, Inc.

Plexus NewsPlexus Group announces newon-line capabilitiesln early February Plexus Group will announcethe release of TransPortrM Version 1.0, itspatented, online and interactive financial servicedeveloped for institutional investors dealing withthe design, execution, and evaluation of programtrades and portfolio transitions. The neu,t productwill be provided securely via the internet tocustomers on a subscription basis and facilitatean objective and independent framework forevaluating and assessing trading performance.TransPortrv Version 1.0 comprises /hreefacilities providing pre-trade analysis of likelyfrade cosfs; post-trade analysis of experienceand lceBreakerlM enhanced OLAP drill-downcube to access previous quarter's order/tradingdata.

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Can Systems Make a Good Trader