Market access is not what it used to be. The business headlines have been dominated in recent months by the so-called battle of the bourses, as large and lucrative securities exchanges seek to build a comprehensive global trading platform. This holds out the prospect to hedge fund managers of the holy grail of true 24-hour trading via a single market platform. The real challenge, however, is getting connected to that global revolution. Many firms are still not trading as efficiently, and cost-effectively as they could be.

Correspondingly, hedge fund strategies themselves are becoming increasingly sophisticated – and ambitious – as they seek to differentiate themselves from an ever more crowded space. Program-based traders, for example, are seeking speedy and efficient access to markets in order to manage their trades properly. Achieving this, however, is not always as easy as it looks on paper. As with many other areas of the IT industry, there are providers who have built up a capability in the banking business who are starting to target proven services at hedge funds, and in a format that funds would find palatable, offering new opportunities for embattled trading officers.

Take Fidessa, for example. Launched 20 years ago as a sell-side platform, it has grown to become the dominant solution for Tier 1 institutions. It now has over 260 clients and 9300 users. A list of the brokers using the Fidessa network reads like a who’s who on the sell-side, from ABN Amro to WestLB, and most points in between. Six years ago it launched what Simon Barnby, Global Marketing Director at Fidessa, calls “a more vanilla-flavoured product” – an ASP solution that is targeted at the lower tiers of the sell side. Called the Fidessa Workstation, it is a fully hosted, fully managed service that can be used by the buy-side and the sell-side, including hedge fund managers. Connectivity is managed from Fidessa’s network of international data centres with access hubs at key financial locations. User access is via leased lines, Radianz, or via the Internet.

“We’ve packaged the data service with order management and execution tools,” says Barnby. “We launched it in the UK at the end of last year, and now we have a number of hedge funds in London and across Europe. It is not as well known on the buy-side because we have not been selling there as long.”

Barnby is aware of the environment in which many hedge fund traders are functioning: “Our pricing data comes straight from the exchanges; we understand that pedigree is important,” he explains. “Hedge fund trading desks are very active, often requiring instantaneous decisions. Should you want to be able to react quickly enough, you will need the right price information. We have to ensure that latency is kept to an absolute minimum.”

Data management

At Townsend Analytics, developers of the RealTick trading and marketing platform, Managing Director Rustam Lam sees data management becoming increasingly important at hedge funds as they seek to firm up their risk management systems.

“We’re seeing hedge funds wanting to access an open platform,” Lam says. “They want to pick out appropriate value. We’re clearly moving into a multi-broker, multi-product world, and we have yet to see front-end technology commoditised. If you can access the market via the same container, you can improve the analysis of your trades. You can acquire better and post-trade analysis, which can be measured in lots of different ways.”

The RealTick platform is increasingly being used to provide value-added services, for example, access to broker algorithmic routes, pools of liquidity, analytics tools, and market data. “Different types of hedge funds use IT in different ways,” Lam says. “They want to control the way they trade and the way they access markets in different manners. They might want to send some trades via direct market access [DMA] and some to the prime broker trading desks. The platform has to be broad enough in terms of capability.”

Convergence amongst providers ahead?

A recent interview-based study released by TABB Group in New York, has pointed to the possibility that direct market access, order management, and execution management systems are converging. In the near term, these platforms will offer multi-asset capabilities, have a base level of commission management and multi-broker functionality, and offer a base level of trading ability at the single stock and portfolio levels with access to custom and mass-market algorithms residing within both sets of blotters.

The buy-side has turned the corner in the adoption of new desk-top trading technology, according to the TABB report’s author, Jeromee Johnson. Instead of adding more systems to their desk-tops, traders are reducing the number of systems they rely on. “Despite this downward trend in the number of trading platforms, the industry remains far from being able to converge on a single platform and architecture,” Johnson says. “And yet, if an algorithm built within an EMS [Execution Management System] can be executed through the smart-order routing and sweeping capabilities of a DMA platform and the trader can seamlessly start and manage the execution from his OMS [Order Management System], does it really matter that three different systems from three different vendors are under the covers?”

The recent changes in the agency brokerage landscape will also have a significant impact on the future of the trading desktop. Johnson says fund managers should expect to see further merger and acquisition activity. “The recent broker-platform combinations of Macgregor and ITG and Eze Castle and Bank of New York will do a much better job bringing together certain OMS and execution functionality, and the breadth of their offerings is creating a new standard for the agency broker.”

From the perspective of hedge funds, the future looks promising in the world of market access systems. Managers can expect more efficient, sophisticated interfaces, more easily tailored to the requirements of individual funds, and which can be integrated with critical internal processes, like risk management for instance. They will be able to benefit from institutional grade technology that has already had its teething problems knocked out of it at Tier 1 level, and which will be offered to them at a far more competitive price. Just in time, in fact, for them to participate in the new global stock-market...