Money managers resisting the installation of trade-order management systems may be adversely affected - and could even be at risk of being swallowed up by larger firms - in the next few years, say some investment software consultants.
Electronic trade-order management takes the place of portfolio managers having to manually buy shares of stocks across their accounts.
It takes the place of traders doing manual calculations on trades, figuring out average price per allocation of shares across multiple client accounts. It also takes the place of passing paper tickets internally to input clerks for manual entry into a firm's back office systems.
In addition, electronic trade- order management can replace internal compliance workers checking after the fact whether a firm's trades followed the trading guidelines.
Definitive numbers on the use of trade-order management systems by money managers don't exist, said Joseph Rosen, an investment systems consultant with Enterprise Technology Corp., New York, and co-editor of the Handbook of Investment Technology.
But Mr. Rosen said: "In my personal opinion, one-half or more (of all money managers) really have nothing out there. Maybe they have spreadsheets, and they think they are really sophisticated, but you are talking about a tiny percentage that are really using any of these (trade-order management) tools."
The use of sophisticated electronic trade-order management could be higher among large money managers, said Kevin Merz, a co-editor of The Handbook of Investment Technology and chief executive officer of ETC.
For money managers with $1 billion or more in assets, Mr. Merz estimated that as much as 40% could have some sort of automation of their trading desk beyond electronic spreadsheets like Excel.
Another 30% to 40%, he said, could have something in their budget for the current year to begin to move to trade-order systems or begin developing a strategy to use them.
Without such systems, Mr. Merz said, money managers are likely to have more operating errors, face higher clerical and additional labor costs and lack the ability to tap into electronic execution order desks. The result, he said, will be poorer client service and the need to pass on higher costs to clients.
Mr. Rosen said some possible reasons money managers haven't installed trade-order systems include holding fast to the old way of doing things, a lack of vision or a small volume of trades.
In addition, he said, the cost of installing a system can be costly for very small money managers, and the selection of providers for trade-order management systems is limited.
The cost of trade-order management systems depends on several factors, such as number of users on a corporate network. But, the annual fee for systems can run from $25,000 annually to several hundred thousand dollars a year, said Seth Merrin, president of Merrin Financial Inc. Merrin, which licenses trade-order management systems.
Just a few money managers outside the U.S. have begun to use electronic trade-order management systems, said Mr. Merrin. But, he said, the number of U.S. money managers taking an interest in electronic systems in increasing sharply because of new problems they are facing.
With assets of managers markedly growing as the bull market continues, managers are having increased difficulty managing all their assets. At the same time, investing has become more complicated because of the growth of investing in international markets.
Institutional investors are pressuring managers to be more efficient. The problem for some active money managers are is that the bull market is making it difficult for them to beat the various market indexes.
As a result, pension plans are pressuring their fees downward, and money managers need the increased efficiency of electronic systems like trader order management, said Mr. Merrin.
"It is difficult to pass on higher costs when you are underperforming the market," said Mr. Merrin.
"These small firms, even some of the big firms for that matter, who don't continue to automate as the others do will be eaten up by (larger money managers) with more vision," predicted Mr. Rosen.
Another possibility for managers who don't automate is that "they could go out of business because they can't compete," said Mr. Rosen.
"We will soon be in a situation" where there will be not many vendors of trade-order management software who have enough money to grow quickly to provide systems for those who need them, he said.
Even though the number of managers with trade-order systems is small, the demand for the systems is "growing exponentially," he said.
"Clearly we are going to be at a point in a couple of years or less where having a trade-order management system is no longer going to be a competitive advantage - rather the lack of one is going to be a tremendous disadvantage that can put you out of business," he said.
trade-order management is a "type of communication in trading that the market is seeing more and more of," said Thomas Morton, director of client services in the brokerage arm at the The Frank Russell Co., Tacoma, Wash.
"Trading technology is advancing with a fair amount of speed," said Mr. Morton.
The lack of electronic trade-order management systems is probably the "missing link" in money managers having integrated electronic systems, said Russell D. Glisker, a managing director with ETC.
trade-order management systems can provide integration by linking electronically to their portfolio management systems, Mr. Glisker said.
To get more money managers and other investors to use trading systems, they will have to undergo organizational changes and changes in cultural attitude, said Mr. Merz.
A couple of the larger vendors of trade-order management systems might have earned together only $5 million in revenue a year, said Mr. Glisker.
Mr. Rosen predicted that "bottlenecks in the pipeline" to deliver trade-order management systems will develop.
He said there will be consolidations among vendors, caused partly because some of them lack necessary financial resources to sustain growth.
Advent Corp., San Francisco, maker of the Moxy Release 2 trade-order management system, is another leading vendor of trade-order management systems for money managers.
Gayle Sullivan, director of program marketing, said that while many money managers are using Moxy, she believes the overall percentage of money managers using trade-order management is small.
She agreed that not using trader order management could be detrimental to managers in the next few years.