MARKET NOTE

FinTech
Terry Roche, Principal
September 2016

The Future of EMS: Third-Generation Platforms

Enable Agility and Big Data Analytics
Introduction

Key Points

Historically, financial services markets have delivered

technology-based service on-premises, especially when it
comes to trading services. As technology advances and
costs come in sharper focus, the industry is more open to
consuming even mission-critical services such as trading as
a service. With cloud architectures now embraced by
many sell- and buy-side firms, vendors of execution
management systems (EMS) have moved to offer cloudbased systems. In reality these are often simply offpremises hosted solutions.
However, as our research
[Introduction to the Third Generation Platform for Financial
Markets, February 2016] has found, a new model--where
hosted services are architected to support big data, social
media and mobile technology in an agile and flexible way-offers the most promise.
The prior generations were mainframe service delivery
which was followed by client/server service delivery. The
EMS, though, is the core of the front office, providing market
connectivity, market data visibility, and the placing and
tracking of orders.
Previous to the offering of integrated service models, the
front office was a loosely coupled collection of siloed
services. Great effort and investment has been is put into
integrating those services, no matter the vendor, with the
EMS. The result is cluttered screens, rigid yet fragile
workflows, ballooning operational risk, and high costs.
The next generation of EMS is possible because its
providers are fully harnessing the power of the cloud with
third-generation platform in mind. For years, cloud
computing in finance has been debated, trialed, and halfheartedly adopted. This is no longer the case. The more
forward-looking service providers are embracing a fully
hosted, cloud-based approach to EMS. The cloud delivery
model for EMS does not include the more generic public and
cloud offerings, instead these are purpose built private
cloud offerings that are proximate to markets and highly
performant, meeting the demands and needs of todays
front offices.

EMS is moving to third-generation platform, cloudbased solutions.

Evolution of EMS to a multitude of tightly integrated

end-to-end services is allowing buy- and sell-sides
to outsource entire front-office tech stacks.

Users of third-generation EMS save significant time

and money, no longer needing each change to be
an IT project.

New model saves on support costs, facilitating

investment in integrating new services rapidly.

Providers are eliminating silos by increasing the breadth of

their offerings and removing the need for costly and tenuous
integrations. They are providing a full front office stack,
including all services needed for the front office to be
operational. These services are Direct Market Access
(DMA), Smart Order Routing (SOR), market data, database
services for trade repositories, reporting capabilities and
more.
These services are supported by an open
architecture to ensure future proofing.
Their customers are the financial firms that realize the
benefits to be gained from cloud-hosted EMS becoming a
full front-office ecosystem. For these forward-looking firms,
the cloud will quickly move from promise to payoff.
However, to fully achieve the benefits inherent in this new
model, financial firms need to re-evaluate how they interact
with EMS and reset their expectations. Firms should expect
la carte yet tightly integrated services, standardized tools
joined into customized workflows, access to multiple asset
classes across multiple geographies, and an onboarding
process measured in days--not weeks or months. In short,
users need to demand more.

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The Future of EMS | September 2016

The Evolving State of EMS

Historically buy- and sell-side firms handled EMS in one of
three ways:
1. Deployed an on-premises client/server vendor
solution,
2. Used a set of bundled services from an electronic
communication network (ECN), or
3. Built in house
All of these are less than ideal. Front offices are requiring a
transition away from siloed services and to the integration
illustrated in Exhibit 1.

Of course execution management is, by definition, a

community proposition. Cloud based end-to-end service
propositions open the potential for greater means access
and collaboration among the participants. Integration of
mobile technologies with todays generation of
authentication capabilities can offer flexibility to market
participants. Additionally, there is an interest in social tools,
particularly on the buy-side, for collaboration and
communication.
An open architecture approach underpins third-generation
platforms.

Removing Expensive Replication

The traditional on-premises, client/server model simply
does not work in a world of highly integrated, tightly coupled
services.
Exhibit 1
A Move to Tightly Integrated Services
Legacy EMS

Trading
Algos

Data Mgmt

OMS

Next Generation EMS

Risk

Portfolio
Mgmt

Compliance

SOR
Research &
Analytics

Source: TABB Group

It is too closed of an ecosystem to provide the innovation

and services demanded by todays front office.
Even for the firms that build in-house, managing venue
connectivity, placing and tracking orders, market data
distribution, and risk analysis are rarely differentiators. So,
rather than build, manage, or maintain any part of the stack
in-house, firms should be looking to achieve greater
reliability, a larger feature set, and fewer costs by moving to
a vendor-managed, cloud-hosted EMS.
Furthermore, customers enjoy improved flexibility and
better time-to-market, thanks to the latest in openarchitecture approach. For example, HTML5 inherently
supports cross-platform applications, e.g., computers,
smartphones, tablets. Big data and visualization tool sets
are other areas offering the possibility to increase profits or
manage risk.

Across the industry, firms build, purchase, integrate, and

maintain direct memory access (DMA), data distribution
layers, research and back-testing systems, risk
management tools, compliance reporting, latency
reductionsand the list goes on and on. This further
requires each firm to build out its own expansive networks,
buy and continuously upgrade substantial hardware
deployments, and staff large front-office IT teams. In the
end, all this expense just gets them an infrastructure that
looks very similarif not identicalto their peers.
When an EMS is fully hosted and managed by a third-party
provider, the provider is doing everything that each
individual firm had to do independently. As providers build
out their infrastructure, anything that can be made multitenant or a shared service will be, achieving great efficiency
when compared to each of their customers doing it on their
own. As a result, their customers are freed of the costs
inherent in infrastructure replication.
At a time when all costs are closely examined and available
capital is precious, outsourcing non-differentiating frontoffice technology to a service-oriented vendor is an
attractive proposition. EMS in the cloud delivers scale,
resiliency, and a growing set of integrated services while
removing operational overhead and the need for large
capital investments in front-office infrastructure. Relieved of
maintenance and development, firms can focus on their true
differentiators.

Replacing Support Costs with Value

With an on-premises, client/server approach, much of the
vendors time is spent in deployment, remote management,
training customer operations desks, and on-site service.
Every new feature and integration starts the high-touch
support cycle over again. This is an expensive service

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The Future of EMS | September 2016

model that limits a vendors willingness and ability to provide

advanced features. Moreover, this model places additional
cost burdens on the client in terms of operations staff, data
center real estate, hardware and software maintenance,
and integration and maintenance to adjacent systems and
applications.
A fully hosted, cloud-based EMS does away with this overly
burdensome support model. Each deployment, upgrade,
and integration is performed only once yet still reaches all
customers. The time and money once spent on costly onsite support is now invested in features and integrations,
broadening the available services and strengthening the
resiliency of the provided infrastructure.

Upgrade projects, which take buy- and sell-side firms

months, succeed in a fraction of the time when performed
by service-oriented vendors. Due to cloud designs that plan
for excess capacity, this could even be as soon as same
day.

The Benefit of Immediacy

Exhibit 2
Front Office Infrastructure
Legacy EMS

Next Generation EMS

Firm

Data
Provider

Vendor

Data
Provider
Liquidity
Venue

Liquidity
Venue

Cloud-hosted EMS provides the immediacy long desired by

all front offices. What were once time-intensive joint efforts
between in-house and vendor support teams can now be
accomplished by changing configurations and permissions.
For example:

Liquidity
Venue

Liquidity
Venue

Liquidity
Venue

Liquidity
Venue
Liquidity
Venue
Data
Provider

Performance-based upgrades, requiring the fork-lifting of an

entire infrastructure in a highly coordinated, error prone
fashion, will become things of the past. In fact, performance
upgrades are managed by the EMS provider. A cloudhosted EMS is fundamentally a distributed system, which
allows the provider to upgrade hardware and software by
degrees, avoiding costly service disruptions.

Liquidity
Venue
Data
Provider

Source: TABB Group

Furthermore, in a cloud world, the vendor controls every

aspect of the system, from network to hardware to software.
The users infrastructure is greatly simplified, as seen in
Exhibit 2. Their IT needs are limited to the network-enabled
desktops they already have. When an EMS provider
manages the entire technology stack, they can ensure a
fully tested, unified system, which cuts down on errors and
results in a better overall user experience. And, of course,
this is all done within a client-approved, service-level
agreement.

Scale on Demand
Cloud-hosted EMS brings its customers a scalability to
which many are not accustomed. Onboarding a new trading
team, bringing up a new strategy, expanding to a new asset
class, or investing in a new geography used to be a costly,
time-intensive effort. However, next-generation EMS
service providers are building such scalability into their
cloud deployments. Onboarding and expanding trading
moves from an IT infrastructure investment to a simple
vendor request.

Getting a new user set-up on an EMS could take a

month in a server/client world, but in the cloud this
takes a day.
Where adding connectivity to a new venue used to
take weeks, now it can take minutes.
Giving a risk or compliance officer the access he or
she required was a budgeted and carefully planned
process, often involving custom code and
measured in quarters. Now, it comes enabled on
startup.

Users of cloud-hosted EMS will also experience immediacy

in ways that were only dreams in the past. Tailoring all the
tools on a traders desktop used to be a fantasy. With nextgeneration EMS, creating a custom workflow is simply
configuring the ordering of already built integrations. In a
real-time world, putting the right tools at a traders fingertips
at the right time can mean the difference between profit and
loss.

A Growing Suite of Services

Providers moving to cloud-hosted services propel EMS into
the next generation by allowing for the rapid expansion of
integrated offerings. By tightly integrating new services with
traditional EMS functionality (and with each other),
providers will empower their customers to leverage their
front-office like never before.

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The Future of EMS | September 2016

No longer just real-time market data, trading, and basic

analytics, providers will up the EMS ante, expanding the
optional integrated services they provide. These services
should include:

Global DMA
A suite of DMA offerings that span all asset
classes and geographies. Customers can pick
the connections they want, when they want
them. Turning on a new liquidity source is no
longer an internal IT project; instead it is simple
permissioning. This applies to exchanges,
ECNs, alternative trading systems (ATSs), dark
pools, single-dealer platforms, and broker
algorithms, giving customers more options and
ease of connectivity than any ECN or singledealer platform could hope to offer.

Supporting de-centralized liquidity

In many asset classes the best liquidity is often
found in direct, desk-to-desk trading. Nextgeneration EMS makes adding a directly
connected counterparty a simple task.

Smart Order Routing (SOR)

In most previously offered SORs, the S more
accurately stood for simplistic. Nextgeneration
EMS
offers
customizable,
algorithmic order routing that finally lives up to
its moniker.

Trading Algorithms
Providing
out-of-the-box,
configurable
execution/trading algorithms, but also making it
easier for a user to create, deploy, and manage
their own.
Portfolio Management and Program Trading
Entire portfolios and program trading can be
supported with next-generation EMS. Simple
risk-on/risk-off interfaces allow users to trade
complex, multi-asset collections of products
with ease.

Pre- and Post-Trade Transaction Cost Analysis

Transaction cost analysis is more than a static
end-of-day report. It has become a live
calculation that can feed and influence trading
algorithms, order routing, and performance
management.

Market Data Management

EMS always managed, used, and displayed
live market data, but EMS is going further.
Access to vast amounts of historical market
data is allowing a user to see the market as it
was 10 minutes, three months, or two years
ago.

Research and Analytics

The expanded historical data is being
harnessed to provide more research and
insight than the previous generation of EMS.
Tools that gave real-time market analytics can
now look much further back, letting users
research trading opportunities and better
assess risk.

Data Integration
Trading has never been simply responding to
pricing updates. The best traders have always
taken into account news, sentiment, financial
reports, economic indicators, etc. Nextgeneration EMS should include these as well,
integrating varied and diverse data sources into
research, trading, and risk management.

Order Management Systems (OMS)

OMS were the digital replacement of the paper
blotter. On their own, they are helpful in looking
at exposure and managing positions. When
tightly coupled with the EMS, they become a
powerful information link between the front- and
middle-office.

Risk Management
Next-generation EMS will have built-in risk
management from the ground up. No longer an
integration
afterthought,
powerful
risk
management tools for both traders and risk
managers are built into all stages of the
lifecycle of an individual order and a portfolio.

Reporting and Live Monitoring

Having all of these services and the data they
generate in the same platform allows for better
oversight than the EMS of old. Performance,
compliance, and risk governance can include
data from every service, seamlessly integrated.
As oversight needs change, new reports can be
quickly added.

Workflow Customization
The more services and options an EMS has,
the more important customization is. Nextgeneration EMS allow the users to pick and
choose the services they use and the order in
which they use them. This level of
customization cuts down on operational risk by
working for the users, not against them.

And it does not stop here! Trade simulation, comprehensive

back-testing, integrated voice trading, and suites of
communication tools allowing sell-sides to better service
their buy-side customers are on the horizon.

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The Future of EMS | September 2016

Liquidity Neutral

Conclusion

Next generation EMS can provide more services and bring

higher value to users than ever before because at their core,
they are broker neutral. These are not Single Dealer
Platforms that are looking to capture their users flow and
keep it in-house. Nor are these the bundled services of
ECNs biased towards their own platforms.

The most forward-thinking providers will usher in the next

generation of EMS by moving to a third-generation platform
based cloud-hosted, managed service model. They are
bringing with them the mix of integrated services and
flexibility that front offices desire but lack. Their customers
will experience lower costs, a better suite of tools, and a
seamless user experience.

Quite the contrary, these are service-oriented technology

companies that are venue- and broker-agnostic, able to
access liquidity no matter its location. These are companies
that know that the best way to attract and keep customers
is to provide seamless, turnkey solutions that broaden a
traders reach and anticipate market demands, while
offering the flexibility to add functionality through
standardized application programming interfaces (APIs).

One question remains. Which financial firms will be astute

and progressive enough to capitalize on this innovation?
Those who are will realize a great many benefits, including
the removal of unnecessary distractions. With nextgeneration EMS, the focus of the front office can go back
squarely where it belongs: driving profit.

About TABB Group:

TABB Group is the international research and consulting firm focused exclusively on capital markets, founded on the
interview-based research methodology developed by Larry Tabb. Since 2003, TABB Group has been helping business
leaders gain a truer understanding of financial markets issues to develop actionable roadmaps and approaches to future
growth. By accurately assessing their customer base, competition, and key market opportunities, TABB Group works
with senior industry leaders to make critical decisions about their business. For more information, visit
www.tabbgroup.com.
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