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May 31, 2003

The Buyside Manufacturer

By Robert Flatley

The game is about to change for asset managers. That means trading will become more cost efficient and seamless. It will resemble a modern manufacturing process.

Actually, investment managers are like manufacturers. They transform raw materials - ideas and information - into products for consumers. Buyside traders operate along assembly lines that have a complex set of supply chain partners.

These partners include brokers, technology vendors, ECNs, exchanges, and others. Buyside traders that interact faster with partners and at a lower total cost, clearly have a competitive advantage.

Now the same supply chain management practices that revolutionized manufacturing are sweeping through investment management. Order management systems (OMSs), trading tools and electronic connectivity are more fully automating workflows. Application specific terminals, excel silos, redundant manual activities, and inefficient telephone communications are on the way out.

Investment managers, the assemblers of financial products, are driving the transformation toward more efficient supply chain standards of processing. And it is accelerating as regulatory and economic pressures grow.

It is clear that more guidelines and standards will be mandated for best execution practices in broker selection and management, trade management processes and disclosures.

As everyone agrees, there are huge basis point gains to be made for investors if end-to-end best execution practices are implemented. But progress has been slow. The primary culprits are too many small and confusing vendors; an inattention to efficiency, and conflict of interest. Still, these have been laid bare by a difficult economy and the efforts of New York Attorney General Elliot Spitzer.

Smart sourcing practices that reduce risks as well as costs are becoming commonplace. OMS vendors, for example, are bundling advanced execution tools from brokers into their own systems. These solutions give buyside traders access to various technologies as well as the ability to execute complex strategies.

Investment managers have to eliminate or automate repetitive proprietary tasks that do not add to performance. Further, they would benefit by adopting transaction management practices that are common across a diverse group of industries. Investment managers need to separate core competencies from the other critical tasks, and build an automated workflow that will accommodate both in-sourcing and outsourcing if it is necessary.

Firms need to use order management systems as the underlying technology that brings together all their supply chain partners. OMSs are the logical place to automate complex trading activities, which include optimizing the execution of a list amongst multiple venues, or simple tasks like phoning orders to brokers.

OMS vendors need to further migrate to open, standard technologies, extending their systems to provide "turn key" connectivity and support to trading partners. Additionally, through these open technology standards, OMS vendors need to offer best of breed tools "right out of the box" to support liquidity access, advanced execution strategies and pre- or post-trade best execution measurement. A few vendors are well on their way.

Firms also need to collaborate with supply chain partners and adopt more efficient ways for interacting. This includes embracing the FIX protocol for order placement and executions and re-packaging proprietary broker tools within the buyside's supply chain. These initiatives will reduce errors, save time, and eliminate the staff required to manually work orders and process trades on both the buyside and sellside desks.

Investment managers are the master assemblers in the investment products supply chain. The opportunity is at hand to gain control of supply chain management in the same manner as elite manufacturers once did. The early adopters will gain a competitive advantage.

Robert Flatley is the chief operating officer of Macgregor, a provider of order management systems.