Buy-side order management systems (OMS) have evolved significantly over the last decade. They have become highly-engineered platforms incorporating a vast array of functionality that goes significantly beyond basic order management, with complex modelling tools, advanced analytics and integrated execution management.
At the same time, there has been a tendency to over-specify on OMS functionality, with businesses investing considerable time and money on implementation and staff training, only to use 10% to 20% of the capabilities they are paying for. Buyers need to identify the exact features they require.
The crucial factor in specifying an OMS successfully is to establish a clear set of objectives that are directly aligned with business needs. If all that the firm requires is a system to generate orders and route them to a number of execution venues or counterparties, then it does not need a full-blown system. In this case, a variety of execution management platforms integrated with portfolio management accounting systems are available.
The next factor to consider is the predicted trading volumes. If the plan is to execute just five trades per day, then it may be better to generate orders from a books and records system, or even enter orders manually into an execution management system. The same is true if only a limited number of counterparties are involved. If a firm plans to trade with just one or two brokers at low volume, then it can probably use broker-provided access to execute.
However, if the firm expects to conduct more than 50 trades per day with multiple counterparties, then manual creation of orders becomes an operational overhead. In this scenario, a firm should be looking at an OMS, ideally broker-neutral, which allows the selection of brokers from a range of connected providers. Higher trade volumes also have an impact on operational control, due to increased risk of input error, and the fact that it becomes difficult to obtain real-time profit and loss (P&L) data. But most OMSs only provide a price P&L rather than real-time.
A question of strategy
Trading strategies will influence the type of systems specified. For example, a hedge fund that wants direct market access will have sponsored access to the exchange as a prerequisite. So it either has to route an order to the direct market access (DMA) desk, or via an OMS or execution management system. Strategy impacts the type of system required and it should be noted that the majority of OMS solutions do not incorporate execution functionality.
A firm also needs to take account of its physical operations. If traders are at multiple locations, then a firm needs to decide whether to centralise its books and records to a global view, and how traders will interact with this system. Traditionally, this is where the OMS providers come into play.
However, there is no reason a smaller firm, with a carefully selected portfolio management and accounting system, cannot serve its traders remotely. Such a system allows users to support an individual OMS deployed at each location. Provided that the orders are generated from the centralised system and are returned to that system to be updated following a trade being executed locally, then a separate execution platform becomes optional.
Finally, a firm must ascertain the operational controls and mechanisms it needs to support its trading plans and to satisfy investor and regulatory requirements.
Large buy-side businesses may well have five different trading locations and between 40 and 50 investment managers routing orders to 30 or more traders. Here, the full-blown OMS flourishes with the ability to route those orders to a trading location or desk based on geography, price or liquidity and in respect of a multitude of other complex order routing scenarios.
This is by no means a universal requirement, meaning firms often end up with an over-engineered OMS infrastructure that is expensive to maintain. Inevitably, there will be changes required as the business grows and so adaptability, flexibility, and scalability are critical. Certainly, it is preferable to implement cost-effective technology that grows with the firm rather than a system waiting for a business to grow into it.
What fund managers need is speed, reliability, flexibility, results and to recognise that an OMS is not the only place to find them.
Gerry Gualtieri is chief executive officer at Tradar
©2011 funds europe