Independent global executive management system (EMS) vendors face an uphill battle to remain relevant in the increasing competitive financial services IT sector, according to new survey by market research firm Aite Group, as broker-owned EMSs continue to make up a great mix of the trading system used by large firms.
Broker-owned and developed systems are integrating existing EMS functionality at the code level and have parlayed the bits and pieces they've cobbled together internally or through acquisitions to build out systems that have enhanced compliance and trading functionality for their customers' and brokers' specific needs.
The report found that EMS spending checked in at $220 million industry-wide in 2010, up slightly from $217 million in 2009. As electronic trading continues to spread to other markets and multiple asset classes, total EMS spending is projected to steadily increase to more than $240 million by 2014.
"The market continues to remain quite competitive, however, especially in the U.S. where many vendors of different types chase a stagnant number of potential clients," the report said. "In order to fuel additional growth, EMS vendors need to look for opportunities globally as well as to build functionality in non-equity asset classes."
Aite Group said it is "inevitable" that the total number of independent EMS vendors -- which currently includes the likes of Bloomberg, Fidessa, FlexTrade, InfoReach, Portware, RealTick, Sungard, Thomson Reuters, TradingScreen among others -- will shrink over the next few years and those that remain will be busy consolidating their competitive positions to differentiate themselves from broker-developed EMS systems.
In order to survive, independent EMS vendors who for years counted on U.S.-based financial services providers for the bulk of their revenue will have to look to emerging markets in Eastern Europe, Asia, Africa and South America to drive growth through the next decade.
"Luckily, most global financial centers are going through changes similar to the U.S. market in terms of fragmentation and electronic trading which would create an ideal opportunity for vendors," Aite Group analyst Sang Lee said in the report. "Supporting global expansion is not without obvious risks, however, such as lack of resources, unfamiliar regulatory regimes, uninformed potential client bases and competition from global brokers."
In November, Goldman Sachs rolled out the newest version of its in-house RediPlus system that uses enhanced algorithms and other tools to help execute more complex trades in different markets around the world and helps the firm and its traders avoid exposure to broad market moves.
Also, one of the unintended benefits of heightened regulation and compliance standards mandated by Congress and the SEC is that it will give trading system vendors an opportunity to differentiate themselves from other independents as well as in-house systems by embedding key compliance and analytics capabilities from the get-go.
"Real-time compliance checks and trade analytics have become a vital part of each trader's typical workflow, especially in today's microsecond trading environment," Lee added.
Aite Group's report also recommends that independent EMS vendors focus on building out broker distribution channels to generate new income streams, although that can be particularly challenging in new countries and markets where the vendor lacks a physical presence.
"As EMS vendors penetrate new markets and develop sophisticated functionality to keep up with client and market requirements, resources will be strained and financial pressures will increase," the report said. "As with most things in life, the EMS competition is not a sprint, but a marathon. Vendors that are able to manage their client priorities correctly and focus on realistic short]term tactical wins to maintain momentum will be in a great position for long]term growth."