White papers
Gerry Gualtieri, CEO at Tradar, examines the factors that buy-side firms need to consider when specifying an OMS.
Question time: how to tell if you really need an OMS
Buy-side OMSs 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. Such features have made an OMS business-critical for many tier-one asset managers. 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 10-20 per cent of the capabilities they are paying for.
The other common mistake is to acquire multiple systems and extensive infrastructure in the belief that it paves the way to trading utopia. Aside from the significant CapEx required, the OpEx commitment demanded by multiple systems installed on multiple servers can be substantial. As well as maintenance, support and upgrades, version control needs to be aligned across all vendors to ensure that server infrastructure continues to function cohesively. At a time when generating a clear ROI from technology investments is a critical factor in the buying process, multiple systems are to be avoided.
Where possible, single-system platforms evidently make the most sense. However, before making the final decision, buyers need to identify the exact features they require. Rather than approaching vendors and asking what the system is capable of, it is far better for smaller buy-side firms and niche players to assess exactly what it is they are looking for, and target a solution accordingly.
A question of objectives
The crucial factor in specifying an OMS successfully is to establish a clear set of objectives that are clearly aligned with business needs. For example, will the OMS be used to manage complex order generation and order routine workloads, or simply to generate orders and execute them in the market? If all 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 OMS. A variety of execution management platforms integrated with portfolio management accounting systems are available, through which the order is generated within the system and routed electronically to an execution management system using two-way connectivity.
The next factor to consider is 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 P&L data. However, although an OMS automates the input process, most are unable to provide real-time P&L, instead delivering a price P&L. As a result, they do not provide an accurate P&L.
A question of strategy
Trading strategies implemented by a fund management firm will influence the type of OMS it specifies. A hedge fund that wants to trade DMA for example, will have sponsored access to the exchange as a prerequisite. So it either has to route an order to the DMA desk, or via an OMS or execution management system. Either way, the user’s trading 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 it is running a global strategy with traders on the ground at each of its chosen locations, then it needs to decide whether to centralise its books and records so that it has a global view, and how traders will interact with such a system. Traditionally, this is where the OMS providers come into play. However, there is no reason why a smaller firm, with a carefully selected portfolio management and accounting system, cannot serve its traders remotely. A centralised portfolio management and accounting 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 needs to ascertain the operational controls and mechanisms it needs to support its trading plans, and to satisfy investor and regulatory requirements.
Importance of posing the question
It is not uncommon for large buy-side businesses to have five different trading locations and between 40 and 50 investment managers routing orders to 30 or more traders. It is in this type of environment that a full-blown OMS flourishes. It has to be able 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 scenarios. OMS developers have consequently added a raft of features to support these highly complex order routing processes.
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 all critical factors. 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.
Considering the factors outlined in this article, fund managers will be able to decide whether they really need all of the functionality offered by an OMS. For many, the chances are that they do not. What they do need is speed, reliability, flexibility, results and to recognise that an OMS is not the only place to find them.
* * *
Complete solutions for complex markets
Since 1997 Tradar has been a leading provider of technology to the asset management community.
Our specialist portfolio management and accounting software has been designed to give you greater speed, flexibility, automation and the tools you require to be truly effective.
Over ten years of listening to your needs has resulted in Insight – a new, comprehensive suite of products developed to help you work to your full potential. Put simply, it’s technology you can trust to deliver.