At the end of the day, it boils down to having a customised interface which can connect smoothly with a variety of execution providers. Traders ought to be able to employ the same system, regardless of their prime broker, and also enjoy a high level of customisation, allowing them to match their blotters to the fund’s own unique requirements.
This is not all a pipe dream either. LatentZero, a buy-side front office technology company founded in 1999, was acquired by Fidessa, a sell-side trading technology and connectivity company, in 2007 – the first time the buy and sell-side have come together. Both companies have been working on solutions designed to make the life of hedge fund dealing desks much easier than it has been to date. Its approach is based on a combination of robust technology and direct market access, coupled with highly customisable Windows-based desktop trading solutions that can be tailored to a fund’s portfolio management and trading requirements.
Fidessa LatentZero traditionally has tier-one institutional asset managers forming its core customer base, with an increasing number of tier-twos and smaller asset managers looking at their systems. Increasingly, established asset managers have been launching hedge funds under their already proven long-only brands in order to retain key investment professionals and satisfy the demands of an institutional client base. As a technology provider to this market, Fidessa LatentZero has been further developing their trading and market access systems, like Minerva OEMS, to cater for the unique front office needs of the hedge fund community, and to help its existing clients deploy hedge funds seamlessly.
Minerva is an order execution management system that is broker neutral and supports all asset classes, including exchange-traded and OTC derivatives, money markets, and FX. It allows positions to be managed on a fund-by-fund basis, or by strategy, or sub-strategy. It also offers integrated trading, with instant connectivity to over 250 global brokers, broker algorithms, DMA, and alternative trading systems.
Managers can use Minerva to ‘slice and dice’ portfolios via any criteria they choose, including via manager or trader responsible for the positions, asset class, long and short positions, and gains versus losses. They can also be analysed according to which positions were sourced by which broker.
Richard Jones, the firm’s CEO, says part of the desire to address the front end technology proposition has stemmed from greater demands from both hedge fund clients and regulators for transparency in the trading function. This is focusing in particular on whether funds are achieving the best price possible from their prime brokers, and whether enough time and effort is being deployed to ensure this. In addition, some kind of easily-auditable reporting function is needed to demonstrate this. The MiFID directive is the latest incarnation in Europe of a drive to make the trading and commissions process more transparent to the end client. It all boils down to a serious compliance headache for someone, unless an effective system can be procured to address the issue in an easy-to-use and highly configurable manner. Touch-of-the-button analytics that can be user-defined in advance to run off reports can save compliance officers a few latenights.
“Hedge funds are being required to improve their internal operations and controls, and this has included addressing their order management and trading systems,” says Jones. “But our front office systems are more than just an audit trail tool. They represent enhanced operational controls, giving managers the inherent control over the positions they need.”
And control is certainly what you get with Minerva OEMS, anyway. It offers pre-trade transaction cost analytics, and the order management and workflow features one would expect to encounter in a much larger asset management outfit than a hedge fund. Users can pass books and orders between desks in the same or different locations, merge and split orders, and manage and report commission. “If customers need to add new columns, for example in their pre-trade analytics in order to assess market impact, then they can add this without having to change the software,” says Jones. “As ever with customisation, the more you provide, the more is required, but we feel that with Minerva OEMS we’re offering hedge funds a high degree of flexibility and a highly configurable interface already.”
The company has been focusing a lot of energy on bringing its capabilities to the smaller, more streamlined management operations, as well as the small and start-up managers. It perceives there to be an appetite for its technology amongst mid-sized firms that are juggling the multi-broker relationships that have led them to using more than one EMS, and thinks it has come up with a solution that can serve their needs as well.
The EMS Workstation is a fully-hosted, out-of-the-box solution with integrated market data, designed for firms requiring broker-neutral market connectivity. It is characterised by the speed at which it can be deployed, with no need for internal technical support. This can be vital if you want to ensure a seamless transition between your front office systems. No one wants unexpected downtime with a fund incapable of trading because its front office transition project has hit an unexpected problem.
Like other Fidessa LatentZero products, its vendor and broker neutrality means that portfolio managers can rely on impartiality and data confidentiality. Connectivity is via the already proven Fidessa network. EMS Workstation also benefits from automatic upgrades at Fidessa data centres, with new execution destinations and product functionality being continuously modernised. Such a model is light on internal maintenance requirements, as all this is being carried on off-site.
Fidessa LatentZero has embraced the philosophy of upgrading components of its software individually on an SOA/EDA basis (Service Oriented, Event Driven), without having to release a new version, which can create extra costs and compatibility issues all over a system. This again is a boon for the smaller firm without a dedicated IT function.
“We increment our technology forwards, so that it doesn’t force a wholesale rewrite,” explains Jones. “We have noticed some of our competitors have had to do full rewrites from time to time.” Fidessa LatentZero, on the other hand, has long been a fan of component-based rewrites, rather than full system upgrades. Using .NET architecture, it has separated out the components of its systems so that they can be rewritten as and when necessary. “Most of the business logic sits in the back end servers,” Jones adds. “If we need to rewrite, probably only one fiftieth of the components needs to be separated.”
As with Minerva OEMS, traders still receive a high level of intuitive execution with the EMS Workstation, whether it be from block order blotter, market data screens, or position views. Block orders can be executed across multiple destinations, and dealers can monitor fills and average prices in real time. It is also possible to monitor execution quality against the market benchmark in the blotter, either graphically or with a user-defined VWAP display. A good level of market data is also provided, including full level one data, plus level two market depth, and a time and sales display for global equity and listed derivatives markets. Want real-time data, company fundamentals, and an integrated news feed? No problem.
But where the attraction of both Minerva OEMS and EMS Workstation may lie for hedge funds is the way they can provide a high level of global connectivity between global trading desks and multiple brokers, even for smaller organisations. True, the bulk of hedge funds operate from a single office, but for those even with two or more offices actively trading markets, Fidessa LatentZero can provide fund managers and traders with the ability to view individual dealer books across the organisation, or indeed take a global perspective, again breaking it down any way they like, by position, fund, company exposure, and so forth. For a more sophisticated P&L, order management and allocation capability across all asset classes, funds will need to upgrade to Minerva OEMS, but the EMS Workstation provides a robust starting point for those who don’t need the broader levels of market integration that Minerva OEMS brings.
Although launched as a stand-alone firm in 1999, LatentZero was acquired by Fidessa in 2006. Richard Jones felt at the time that his client base wanted more robust and widespread connectivity for the LatentZero product range, including a hosted version, and the ability to connect across a range of global markets and multiple locations. Fidessa had that infrastructure, and it made more sense to sell the firm to Fidessa than raise the funds to make the necessary investment in LatentZero which customer demands required.
With Fidessa as parent, LatentZero has been able to deploy globally, connecting to Fidessa’s DMA network via FIX protocols. An ASP version of its Minerva OEMS product is in the pipeline and ought to be deployed next year. This has been facilitated by the fact that Fidessa has already made the requisite investment in secure data centres that robust ASP solutions require, given that some 85% of Fidessa’s enterprise business is hosted. “We’re excited about the ASP option,” says Jones. “Our systems are functionally very rich, and this will enable us to cater for the smaller hedge funds that don’t have the internal infrastructure to host and maintain a fully fledged OEMS system.”
Although touched on already, it is interesting to see how compliance is creeping up the agenda for many developers of front office applications in both the hedge fund and long only fund management industries. In the case of Fidessa LatentZero, the developer has been working to upgrade the level of detailed oversight and reporting of execution its systems can readily offer. Minerva OEMS, for example, already offers workflow control and an audit trail, as well as comprehensive support for MiFID order handling, best execution, and record keeping requirements. Pre and post-trade compliance checks can be integrated throughout the order management and trading process, and compliance checks can also be carried out at fund, strategy, and sub-strategy level.
This high degree of user configuration can be deployed at the compliance level as well, so rules can be drawn up covering restricted security lists, disclosure limits, and shareholding thresholds. This also helps the active deployment of risk management policies at the execution stage of the trading process, and will bring additional levels of comfort to investors in funds that are active and regular traders. It heralds an era where risk management parameters can be ‘locked’ into order management and execution processes in advance.
And what of the future? Hedge funds are going to be moving with the times, as their relationships with their prime brokers, and the way prime brokers themselves are policed, continue to change. Jones sees a move away from the traditional multi-broker model that many large hedge funds are currently using, with some seeking alternative means of market access. “We’re seeing some big funds trading away from the prime brokers, plus the introduction of stronger Chinese walls within the banks themselves,” he observes. While smaller hedge funds are likely to remain tied to their brokers, and the trading systems they offer client funds, larger players are navigating a more independent route, looking at alternative execution destinations to help them keep their interests in specific positions discrete from the market at large.
With portfolios of the larger firms getting bigger every year, the interests of specific funds in a given deal are becoming price moving events that they are keen to avoid disclosing. “This could be an opportunity,” Jones admits.
As the biggest hedge funds get bigger, and manage multiple strategies across a wide variety of markets, they are turning to technology solutions that have been tried and tested at the cliff face of institutional asset management. It is only fit and proper that, as they shoulder the increased reporting and regulatory burdens that managing institutional accounts requires, they put in place front end solutions that meet those responsibilities.
With both Minerva OEMS and the EMS Workstation, Fidessa LatentZero has produced applications that combine market access with the kind of detail and user-defined interface that meshes smoothly with mature risk management and compliance processes. These kinds of demands are likely only to increase moving forwards, and COOs will need order and execution management systems sitting at the front end of their businesses that can provide the detail the evolving regulatory environment requires.
That aside, it was also inevitable that the larger and more sophisticated hedge fund complexes would eventually turn to broker neutral systems as the best way of exerting an enhanced degree of control over the order management process. It is a practical solution to the otherwise tangled web of multiple trading systems across multiple markets, a situation that injects an unnecessary degree of operational risk into the investment management equation at a time when firms are seeking to reduce them.
Jones has been the CEO of Fidessa LatentZero since its incorporation in 1999. He has two decades of experience working in both the financial services and IT industries. As IT director of Jardine Fleming Investment Management in Asia, he was responsible for all aspects of IT strategy, implementation, and support across the region, managing a team of 80 IT staff. He has also worked for Coopers Lybrand, the management consultants, providing strategic advice on systems and package selection to large financial institutions. He was seconded to Tokyo for two years to lead the development of warrant trading and equity research systems for a number of leading securities firms.