Buy-side take-up of execution systems threatens ECNs

Technology systems

A need to manage trades more efficiently across assets, combined with the proliferation of available platforms and exchanges, is pushing the buy side towards greater use of execution management systems (EMSs), which could lead to a shift in the position of multi-dealer platforms in foreign exchange.

“It’s going to be quite competitive. To survive, electronic communications networks (ECNs) need to become more like EMSs – they don’t necessarily have to call themselves that, but they will need to provide the ability to do more. It’s about having options on how you trade, having the possibility to work an order in many different ways,” says Lee Sanders, head of foreign exchange and money-market execution at Axa Investment Managers in London.

Axa is migrating its execution business to technology vendor TradingScreen's multi-asset execution management system TradeEMS. Such systems have seen increasing take-up in recent years as firms face the problem of managing a greater number of trades across a variety of asset classes and venues.

"The difficulty of managing several smaller fills from a multitude of different execution venues within one order is what drives people to greater use of EMSs,” says David Berney, consultant and founder of Ergo Consultancy in London. “If FX sees the same proliferation of venues as equities has, then people are going to have to do the same thing in terms of how they manage the information flow, which will mean EMSs come more to the fore."

The need to reduce operating costs amid the current economic downturn is also prompting firms to take a one-size-executes-all approach, leading to demand for systems that are able to handle orders across asset types.

"Several buy-side firms have acknowledged they are reorganising their execution desks, and are trying to reduce the number of technologies they put on the desk, so they are going to be much more focused on a cross-asset type of execution than they were in the past," says Stéphane Malrait, global head of electronic commerce at Société Générale in London.

The increased use of EMSs raises the question of where FX multi-dealer platforms fit in the new environment. Execution system providers are willing and able to connect directly to most ECNs, but specialist FX platforms then become merely one venue among many for traders, losing their hold on customers that are looking to trade cross-asset in a greater variety of ways.

"We could see a move towards equity-type execution, where the EMSs connect to different exchanges or pools of liquidity (ECNs, bank or multi-dealer platforms) and aggregate those pools of liquidity before execution. This could change the position of the multi-dealer platforms in the market,” says Malrait.

Robin Strong, director of buy-side market strategy at London-based technology provider Fidessa, which offers a multi-asset execution system, says he has seen a trend towards disintermediation in the industry – traders using an EMS request-for-quote (RFQ) option to bypass platforms and go directly to brokers, for example. However, different styles of trading mean there is still plenty of room for ECNs to compete, he says.

"If your trading volumes are low, with large, high-value trades, and you’re taking time to execute them, then there’s the potential to get a cheaper price because you’re not paying the platform provider. But on the flip side, a lot of platforms also offer pseudo order books, click-to-trade style and streaming prices, with tighter spreads than you'll get with RFQ. We’re seeing different types of trading, so I don’t think the EMSs will necessarily replace these other platforms," he says.

And according to Nick Green, head of global markets e-business at Crédit Agricole Corporate & Investment Banking in London, not all buy-side firms have the need or the budget to deploy such a system.

“The benefits include speed and reliability of execution and post-trade processing, and the ability to compare a wider range of prices quickly to ensure best execution. The challenge is that a system that does this reliably – and across multiple asset types – will be complex and expensive to deploy. That cost can only be justified in a small number of larger institutions,” he says.

Jim Kwiatkowski, head of transaction sales at Thomson Reuters in New York, doesn’t believe the move towards cross-asset solutions poses a threat to FX specialist platforms.

“Diversification of investment portfolios means that, increasingly, market participants require multi-asset capabilities, which clients of FXall and Thomson Reuters can access through Thomson Reuters’ extensive multi-asset capability. At the same time, FX traders have unique requirements due to the nuances of the market. They need immediate access to deep FX liquidity, complete end-to-end workflow solutions across the transaction lifecycle, and execution tools created specifically for the FX market,” he says.

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