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COMM E NTARY 74 JANUARY 2OO3

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 ma-
ture. 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
productivity;
management systems is strong and getting o A high level of "eyes shut" electronic trading
stronger. The driving force is enhanced desk does not compromise quality;
productivity. o Electronic trading processes clear the desk of
the chaff trades, permitting concentration on
. The vast majority of Plexus clients (80%) have difficult orders; and
highly automated order generation processes. o Despite the inroads of electronic trading,
Automation level is independent of trade traders make good use of market makers for
volume, desk size, and total trade costs. While the tough orders,
96% of Plexus clients use some form of OMS, o Desk value-added is not related to svstems
not all have systems that link the desk with both usage overall.
the PM's and the brokers.
. 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
and improved connectivity. have traditional paper ticket/phone processes.
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.
 billion. Surprisingly, they also showed the widest
O rder M a n ag em e nt Sysfems range of FIX connectivity (from 5 to 75 brokers).
MacGregor and custom systems also had large
An order management system (OMS) is 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
Mgmt. Overall Active Momentum Value the question of whether the
Svstem Total Desks Desks Desks Desks OMS choice for these
Charles River 4% Ao/o 40/ 11% 0% managers was a cost issue or
Custom 20% 20% 20% 11% 40%
one of compatibility with front-
end accounting systems.
Decalog 4% 4% 0% 59.i 5%
EzeCastle 9% 0% 8% ZlTo 0%
From an OMS perspective, we
Longview 14% 24% B% 217t 15% did not see any distinctions by
MacGregor 26% 36% 16% 26% 20% vendor for a superior cost
Moxy 14% B% 32% 5% 10% picture. Manager and trader
Other 5% B% 4% a% 5% costs were consistent with
None 4% 0% 8% 0% 5%o each system's relative order
100o/o 100% 100% 140% 100%
difficulty. Charles River and
Eze-Castle clients, for
Overall, MacGregor was the most popular system example, had higher adverse order momentum
with 26% share. Custom systems were second at and consequently showed higher execution costs.
20%. Longview and Moxy both had mid teens Similarly, we saw no relationship between vendor
representation. When we looked at the 25 largest and trader value-added. A good system can
desks, MacGregor dominated with a 36% share. make the desk more productive, but it will not
Custom and Longview each had at least 20%. replace sound trading practices. What an OMS
Among the least active desks, Moxy was the clear does provide is the information necessary for
leader with a 32o/o share. Custom OMS systems detailed feedback on PM and trader practices.
had the greatest relative share among the value
desks reflecting their importance to the larger,
more diversified stvle desks. Wiring It AII Together

OMS Vendor Ch aracteristics 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 near-
volume. 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
of the desks employed low levels of FIX usage. A
Qualitative Commenfs On OMS
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 com-
number 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
is that a high level of "eyes shut" (automated
solving specific bottlenecks for individual desks
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 FIX survey respondents echoed Charles Dickens
looked very sound. 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
Reprint any portion with credit given to:
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@ 2002 Plexus Group, Inc.
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.