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The Evolution Of The Trading Desk

While funds are in flux due to the consolidation and transformation needed in the face of the pandemic, trading technology architecture has remained stagnant, even as other parts of trading infrastructure leapt forward. Artificial intelligence, faster technologies and blockchain have all revolutionised parts of the desk, but still the traditional trading desk has seen a degree of fragmentation, with the responsibilities of traders on the floor broadening. Often using a number of disparate systems to manage their workflows, traders are beginning to report feeling overwhelmed due to the slow uptake of available tech solutions.

Many firms are stubbornly hanging onto discrete execution (EMS), order (OMS) and portfolio (PMS) systems that they’ve subscribed to since the turn of the century. Unfortunately, many firms haven’t upgraded their legacy systems for fear of complicated integrations that will force firms to work with sub-standard iterations of technology. And while there have been attempts to join certain parts of these functions together, this isn’t an industry norm. 

Although there have been some attempts to integrate by bringing together elements of OMS and EMS or by sharing workflows between OMS and PMS, the vast majority of this multi-trillion-dollar industry actually still uses separate providers. The end result is usually a clumsy and complicated amalgamation of a system and one that ultimately stands in the way of efficient trading and enhanced returns.

Segmentation before unification 

When individual systems were initially created, a symbiotic relationship formed between the people developing the technology and those using it, with job descriptions and roles increasingly aligned to the capabilities of the system. An EMS worked for a trader, and traders worked with their EMS in turn.

As systems continued to develop and gain features, be that new algorithms or reporting capabilities, specialisations continued, and an arms race ensued. Software firms focused on selling discrete components where they were ‘best in breed’ and in-house technologists assembled a software stack that combined elements from each system. Much of the job of these in-house professionals came down to selecting and then installing these systems.

The disadvantages of this approach were manifold, even if the solution was not readily apparent. Smaller funds ended up suffering because they needed to buy two or three systems which were not only operationally inefficient but also dragged performance. Larger funds faced complex integrations that meant it was hard to shift providers and spent unnecessary hours on system architecture.

These changes have only accelerated in recent years as ‘traditional’ buy-side roles have started to blur and break down. This might have started at smaller funds, where the portfolio manager and trader were the same person, but fee and regulatory pressure have expanded the job roles of almost everyone who works at an investment firm. The formerly one-to-one ratio between technology systems and employees is now less and less common, meaning that traders spend time switching between incompatible or poorly-linked systems, moving the same data around in the course of their job.

Integrate or die 

Integration is the self-evident answer. However, moving from concept to implementation has been over a decade in the making. 

Market leaders are usually reluctant to use integrated solutions unless they represent the apex of existing solutions. Efforts to do this have usually come from a provider stronger in one particular area to acquire the other parts of the combined POEMS. The result is a system that is technically an all-in-one POEMS but tends to have integrations with other 3rd party providers or via acquisitions. This ultimately makes some of the most valuable benefits of a combined system – seamless data transfer, easy switching and consistent user experience very difficult to achieve.

From the buy-side to sell-side, the entire financial system would benefit from a leapfrogging step in design architecture. A change is especially relevant for new funds that can rapidly deploy the entire system, which could ultimately help them launch their fund earlier. Very large institutional funds with large risk, compliance and trading departments and complicated relationships could also experience much better operational efficiency.

Combining the EMS, OMS and PMS systems can result in a more in-depth insight on current and historical trades, allowing funds to be more flexible and improving the decision-making process. Doing this would mark the beginning of the last phase of a decade-long journey and allow them to gain an edge on the competition. 

Asset managers and hedge funds, listen up: it’s time to break the mould and start again.

Chris Jenkins is Managing Director at Tora


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