Can Systems Make A Good Trader

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NTARY 74

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CAN 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 of Order Management Systems (OMS) on most desks. However, the industry is far from mature. With new AIMR trade guidelines and T+1 looming, periodic reviews of system usage help 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: electronic order generation, order management systeps and FIX connectivity.

. System performance conclusions:

Key Findings:

o The key differential is that FIX enhances desk

. Client commitment

to integrated

order management systems is strong and getting stronger. The driving force is enhanced desk productivity.

. The vast majority of Plexus clients (80%) have highly automated order generation processes. Automation level is independent of trade volume, desk size, and total trade costs. While 96% of Plexus clients use some form of OMS, not all have systems that link the desk with both the PM's and the brokers.

productivity; o A high level of "eyes shut" electronic trading does not compromise quality; o Electronic trading processes clear the desk of the chaff trades, permitting concentration on difficult orders; and o Despite the inroads of electronic trading, traders make good use of market makers for the tough orders, o Desk value-added is not related to svstems usage overall.

. Custom solutions remain popular with large El ectro n i c O rd er G enerati o n volrime ctients that have the scale to support An important first step to an efTicient investment development and customization. Vendor process is timely delivery of orders to the desk. selection criteria among larger desks focused The advantages of electronic transmission are on scalability, asset coverage and connectivity that it [1] saves time, [2] reduces errors and [3] with brokers. feeds directly into compliance and order . ln the past 2 years, 25% of surveyed clients management systems. About 80% of Plexus

have switched OMS vendors. The impetus for clients incorporate order automation from the PM change has been comprehensive functionality to the desk. The remaining 20% of managers have traditional paper ticket/phone processes. and improved connectivity. We did not find a significant cost difference . FIX (Financial Information eXchange) usage has between clients with and without well-integrated little middle ground as firms either embrace or systems. But desks with good systems, however, eschew it. Technology may promise more than seemed much happier about it in terms of items it can deliver. [1] and [2] above.

O rder M a n

ag em

e

nt Sysfems

An order management system (OMS) is

billion. Surprisingly, they also showed the widest range of FIX connectivity (from 5 to 75 brokers). MacGregor and custom systems also had large

the dollar volume characteristics and more consistent critical tool to managing the large flow of orders capacity for broker connectivity. All three systems crossing desks each quarter (median quarterly handled the higher average trader configurations order load was 6600 orders.) OMS's come in all associated with the larger volume desks. shapes and sizes, costs and capabilities. We present two perspectives on OMS usage. The first Decalog had limited representation in the small looks at market share for systems according to cap sector, but its clients sported the largest activity and style segmentation. The second average trading volume at $2.4 Billion. Charles summarizes characteristic and cost results for the River, EzeCastle, and Moxy showed the smallest OMS vendors. average volume in both large cap and small cap strategies. Both Charles River and EzeCastle, O rder M a n ag em e nt Sysfem however, had multiple times their average Market Share Analysis penetration within the higher mcmentr:m quartile" The lower average volume among these managers raises Order 25 Most 25 Least Lrg Cap Lrg Cap the question of whether the Mgmt. Overall Active Momentum Value OMS choice for these Svstem Total Desks Desks Desks Desks managers was a cost issue or Charles River 4% 40/ 11% Ao/o 0% one of compatibility with frontCustom 20% 20% 20% 11% 40% end accounting systems. Decalog

4%

4%

0%

59.i

5%

EzeCastle

9%

0%

8%

ZlTo

0%

Longview

14%

24%

B%

217t

15%

MacGregor

26%

36%

16%

Moxy

14%

B%

32%

Other

5%

B%

4%

None

4%

0%

8%

100o/o

100%

100%

Overall, MacGregor was the most popular system with 26% share. Custom systems were second at 20%. Longview and Moxy both had mid teens representation. When we looked at the 25 largest desks, MacGregor dominated with a 36% share. Custom and Longview each had at least 20%. Among the least active desks, Moxy was the clear leader with a 32o/o share. Custom OMS systems had the greatest relative share among the value desks reflecting their importance to the larger, more diversified stvle desks.

OMS Vendor Ch aracteristics

From an OMS perspective, we did not see any distinctions by 26% 20% vendor for a superior cost 5% 10% picture. Manager and trader costs were consistent with a% 5% each system's relative order 0% 5%o difficulty. Charles River and 100% 140% Eze-Castle clients, for example, had higher adverse order momentum and consequently showed higher execution costs. Similarly, we saw no relationship between vendor and trader value-added. A good system can make the desk more productive, but it will not replace sound trading practices. What an OMS does provide is the information necessary for detailed feedback on PM and trader practices.

Wiring It AII Together

The third leg of the electronic transaction process is FIX connectivity from the client OMS through Longview clients had the highest average trading the broker. With the tantalizing potential for nearvolume. Their LC average of $10 billion more instant order transmission, our initial assumption than doubled the median manager total of $3.9 was more extensive usaqe. What we found was

FIX usage grouped at the extremes. About a third Qualitative Commenfs On OMS of the desks employed low levels of FIX usage. A slightly higher 40o/o of clients made extensive use And FIX Systems of FIX connectivity for trading. When we looked at most active/least active and large cap/small About 25% of the respondents said that they had cap groupings, the same usage pattern persisted changed OMS vendors or initiated a major with about a third making little use of FIX and upgrade cycle within the past two years. Given somewhere over 40o/o making frequent use of the the costs, complexity, required system resources technology. Momentum clients proved to be the and transition length, we were somewhat one exception, preferring direct access to brokers surprised by the number of clients shifting via phone rather than working orders via FlX. systems. The two major reasons for change were dissatisfaction with existing vendor and need to handle global issues. Transition time ranged from Does FIX deliver the goods? 1 month to two years and counting. The most frequent OMS addition was EzeCastle, which won . Without question, the OMS/FlX combination praise for short implementation time. Longview enhanceci cjesk productivity. The avei'aEe was another multiple winner with kudos for comnumber of orders is now over 9300 per prehensive functionality. Dated technology quarter. When we look at quartiles of FIX platforms like Predator showed the highest usage, the distinctions are more striking. number of defections. Low FIX (< 25%) users had average order totals of 4400 for the desk and 930 per Comments on what works showed why traders trader. Heavy FIX users were considerably believe OMS and FIX can make their jobs easier. more active, handling nearly '12,000 orders, Popular features were rebalancing, organization 3X the flow of low FIX using desks. and compliance. Shortcomings also related more . With respect to trade quality, the good news to functions that might make their jobs easier by solving specific bottlenecks for individual desks is that a high level of "eyes shut" (automated routing) electronic trading does not com- (currency, reports, step outs, etc.) Traders promise trade quality. Clients achieved costs seemed less focused on how these systems might in line with PAEG/L for the basket of heavily cut costs.

"FlXed" trades. DOT orders were a few basis points expensive while program results looked very sound.

FIX survey respondents echoed Charles Dickens when connectivity was cited as both the best and worst of factors. Among the connectivity These results point less to shortcomings of complainers, the break point seerned to be less FIX but rather to good judgments on the than 10 brokers. The second most important part of traders as to which trades to handle benefit cited by clients was ease of use. electronically. ln our "Market Maker in the Surprisingly, only one client reported speed as the AGE of the ECN"* we highlighted the key benefit. In the "what needs work" category, continuing role for the highly skilled and well- clients most often cited reliability. connected broker. With B0% of trade dollars in orders requiring more than 1 day's volume, Conclusions: AII Wired Up accessing liquidity remains the crucial issue. But Where to GO? Electronic systems excel at siphoning off normal volume in a very cost effective manner. Electronic trading makes a fast connection, but Systems are much less effective, though, at does it get you where you need to go? Without a creating volume and Plexus clients still rely on doubt, technology plays a key role in expanding market makers for this role. the productivity of the desk. Among the many

productivity enhancing factors cited by clients are speed, organizational facilities for trader specialization, program development, allocation, error reduction, and improved indications of order interest. Systems free up time for traders to focus on the more difficult orders where they can add the most value. We see dramatically higher order levels for desks using a combination of an OMS and FlX. Having said that however, many clients report that OMS and FIX systems are works in progress. Once built, they immediately become legacy systems requiring significant maintenance and customization at the user level. The evidence for the past year suggests that systems have not made the average Plexus client better iraders. Clients have changed OMS vendors in pursuit of greater functionality. To reach fruition, these systems must develop greater flexibility for adjusting orders on the fly and smarter feedback algorithms to gauge the development of liquidity in relation to costs. Effective desks learn and adapt techniques to their own particular needs. *Available on line at www.plexusgroup.com

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Plexus News Plexus Group announces new on-line capabilities ln early February Plexus Group will announce the release of TransPortrM Version 1.0, its patented, online and interactive financial service developed for institutional investors dealing with the design, execution, and evaluation of program trades and portfolio transitions. The neu,t product will be provided securely via the internet to customers on a subscription basis and facilitate an objective and independent framework for evaluating and assessing trading performance. TransPortrv Version 1.0 comprises /hree facilities providing pre-trade analysis of likely frade cosfs; post-trade analysis of experience and lceBreakerlM enhanced OLAP drill-down cube to access previous quarter's order/trading data.