November 2014

TECHNOLOGY: OMG! What’s happened to the OMS!

TechnologyChanges in technology, investment strategy and the regulatory environment have all conspired to alter managers’ IT infrastructure. Nicholas Pratt looks at how these changes have affected vendors of order management systems. Later this month the tenth Funds Europe awards ceremony takes place. Among the 22 prizes will be four dedicated to the best technology products and services available to investment managers. The changing entrants and the categories reflect the extent of change in technology, investment strategies and firms’ business objectives that have taken place in these ten years. These changes are evident in the developments in order management systems (OMS) which were once installed at the heart of a firm’s IT infrastructure bringing order to their front-office activity.  As a result of cost pressure, firms are now looking to reduce the number of front-office systems that they employ, including OMSs.  “Firms have built up an array of front office systems over the years with one for each asset class or one for each star manager and their system preferences,” says Clare Vincent-Silk, principal at consulting firm Investit. “In addition they have added on additional systems for new front-office functionality like compliance or commission management. Now managers are looking for a more consolidated approach and simplified architecture to reduce the cost of multiple licences and complex maintenance.” Cognisant of this trend, the well-established OMS vendors have added trading and middle office capabilities by combining the OMS with execution management systems (EMSs) and portfolio management systems (PMSs) to turn them into global, multi-asset investment management systems. Some have done this through acquisition. In April 2013 the Eze Software Group was created through the amalgamation of an OMS vendor (Eze Castle), an execution management system (RealTick) and a portfolio management system (Tradar). These are still separate systems, albeit under one roof, with the EMS available via a private cloud and the OMS and PMS available as in-house installations. “The long term aim is to have a fully integrated, front-to-back system available via the cloud,” says Rob Keller, chief product officer at Eze Software Group.  The first step in this migration is making the important reference and position data available (known as the investment book of record, or IBOR) in the cloud. “Until we get those core pieces into the cloud we will not be able to provide compliance, trading, analytics and portfolio modelling,” says Keller. In a perfect world, says Keller, he would sell the whole front-to-back, cloud-based offering to managers but in reality many clients will retain their existing back-office legacy system or a number of broker-sponsored EMSs and Eze’s OMS will have to be integrated with these systems. “So when we roll this out it won’t be only available as a complete front-to-back offering but available on a modular basis.” COMPLETE REBUILD
Other vendors have looked to achieve the same front-to-middle office functionality by completely rebuilding the system, something which Charles River has undergone over the last decade, says Tom Driscoll, the company’s managing director.  “If a vendor is focused solely on an OMS, they will have long-term problems. They need to be multi-asset class, with compliance and risk and with an IBOR included.” However, the new features, whether through acquisition or a system overhaul, have had implications. “Because these systems have taken on so much extra functionality, upgrades are not simple,” says Vincent-Silk. “They can be as complex as a new implementation in terms of cost and time and this often makes managers consider switching to other vendors. More regular upgrades are actually better so that the level of change is not so big, but the costs render this impractical.” There is also the challenge of maintaining data consistency amid all the systems consolidation, says Vincent-Silk. “Every year our clients say that data is their key challenge so any vendor offering that can help with data management and data governance will be popular. People need to consider their architecture from a data perspective rather than purely technical.” It is a very interesting time for OMS vendors as they try to establish new models, says Steve Young, chief executive of investment management technology consulting firm Citisoft. “The jury is still out as to whether they have been successful but I do have some sympathy for them. The demand from managers for more functionality across more asset classes has driven them from being nimble front-office systems into large, unwieldy beasts.” Furthermore, every move OMS vendors make into new territories brings competition. For example, migrating their systems to the cloud makes them vulnerable to some of the smaller cloud-based vendors that have operated in the hedge fund space serving smaller clients that may feel like stepping up into the large asset manager space.  There are also traditionally back-office vendors, such as SimCorp or SunGard, that have added front-office functionality, or traditionally front-office vendors such as Bloomberg that have done the opposite and added back-office processing.  As Ronan Donnelly, chief operating officer of Front Arena, SunGard’s asset management business, comments: “Traditional OMS systems have provided functionality covering a narrow part of the trade lifecycle and
for a limited set of products leaving portfolio management systems well positioned to build upon the existing front-to-back support for complex OTC [over-the-counter] instruments by adding OMS and portfolio-based trading functionality covering all asset classes.”  The incumbent OMS vendors’ dilemma is how to evolve into the world of modular systems and cloud-based services, says Young. “For traditional vendors to take on the modular approach it does mean re-architecting the platform and that is not easy. And for the move into managed and cloud services, the crux of the issue is how quickly the vendors are able to articulate their new models to managers and to work out how the revenue model will still benefit them. This may involve some vendor education.” STRUGGLING TO EXPAND
Every OMS vendor is struggling to expand their value proposition, says Mark Israel, vice president at Sapient Global Markets. For example, how deep into the transaction lifecycle do they go and how wide should the multi-asset coverage be? The danger for OMS vendors is that while they strive to reposition their products for a new environment and branch into new areas, other developments might leave them marginalised – for example, the current focus on developing an IBOR, something that Sapient is helping clients to develop. “An IBOR keeps real-time positions throughout the day and distributes it to all other systems including the OMS. It is centralised and provides full data integration, data taxonomy and common messaging protocols. However, a fully functioning IBOR limits changes the OMS from being a support for order decisions to merely more a system for order entry/management and maybe some post-trade activity.” Another challenge facing OMS vendors is that increasingly the focus for their clients is not on specific products but on the general culture of a vendor.  For example, Israel cites one investment management client that has used an installed OMS for many years and is looking to upgrade or replace it. But instead of searching the market for another OMS to install, Sapient is instead putting together a “target operating model”.  “This is essentially a planning tool for the client to articulate how they want to operate in the future. It is not rigidly set and is a moving target to some extent but it is more about finding the kind of technology that suits their ambitions rather than gearing their business around the technology products that they buy. It is also reflective of the greater role that the business is taking in technology changes.”  It is a trend that Citisoft’s Young has also noticed. “Vendors are moving away from being tied to specific products and instead are offering a mix of software and services, especially on the data side, as they look to add value-added services that deepen their relationships with clients.  “This will mean getting closer to the data vendors and I think this will create a more complex environment with more intensive competition. At the moment there are only a limited number of data vendors that all offer similar things,” Young adds. Charles River’s Driscoll says it is also essential for front-office vendors to have a data strategy not only to manage their own integration issues but to help the move away from products to services. “Ten years ago, the vendors were selling software. Then five years ago they were developing hosting solutions. Now investment managers are not buying a system, they are subscribing to a service.” Such a move will also change the way asset managers should approach their vendor selection says Young.  “Firms have got to look at total cost-of-ownership and where they want to be in the future. It is very difficult to predict what the software market will look like in the future and managers are not traditionally good at that. We are potentially on the cusp of a different model so managers have to look not just at the functionality of the system but the culture of the vendor.” ©2014 funds europe

Executive Interviews

INTERVIEW: Put your money where your mouth is

Jun 10, 2016

At Kempen Capital Management, they believe portfolio managers should invest in their own funds. David Stevenson talks to Lars Dijkstra, CIO of the €42 billion manager.

EXECUTIVE INTERVIEW: ‘Volatility is the name of the game’

May 13, 2016

Axa Investment Managers chief executive officer, Andrea Rossi, talks to David Stevenson about bringing all his firm’s subsidiaries under one name and the opportunities that a difficult market...


ROUNDTABLE: Beyond the hype

Oct 13, 2016

The use of smart beta investing continues to grow. Our panel, made up of both providers and users, discusses what the strategy actually means, how it should be used and the kind of pitfalls that may arise when using this innovative investment technique.

MIFID II ROUNDTABLE: Following the direction of travel

Sep 07, 2016

Fund management firms Aberdeen and HSBC Global meet with specialist providers to speak about how the industry is evolving towards MiFID II.