Competitive forces are at play in the OMS and EMS markets where vendors are expanding their capabilities at both ends to build the coveted OEMS.
Due to tighter IT budgets, compliance mandates and expansion of electronic trading across asset classes, firms may be looking to bring these two platforms together.
In the recent Aite Group report, “Buy-Side Trading Technology: Multi-Asset EMSs’ Listed Derivatives Functionalities,” the financial markets research firm discusses market trends and the industry’s ongoing interest in an integrated solution for multi-asset trading.
Industry pressures to achieve operational efficiencies, cost savings and increased value from an integrated trade life cycle are behind the push to bundle both platforms, which, in turn, is what’s driving consolidation, according to Aite’s report.
Following are highlights
- Leading EMS vendors are working on developing the global, multi-asset class EMS to retain and win new clients.
- OMS vendors are venturing into EMS turf, either through internal development or acquisitions of front-office trading platforms.
- While buy-side OMSs have been multi-asset capable for quite some time, sell-side legacy EMSs still remain largely a single asset class market, and product best-of–breed.
- OMS vendors will integrate more multi-asset trading functionality by buying or building trading and analytics solutions like EMSs.
- OMS vendors will attempt to offer an integrated solution –an order execution management system (OEMS).
Large institutions are demanding that execution features be added to their existing OMS systems, while smaller active trading clients are insisting on risk management and compliance features be added to their EMS platforms. Hence, it was inevitable that the OMS and EMS would rapidly converge, states the report.
“Not only is this a trend, but it’s almost going to become a requirement,” comments Rajiv Kedia, principal and associate Founder at FlexTrade Systems, whose firm offers an integrated OEMS to the buy side called FlexONE. While many hedge funds started off with an EMS, workflow changes, trading and compliance requirements have impacted their need for an OMS. “As time goes by, and as the expected compliance is increasing on hedge funds, they need much faster turnaround, especially for the quantitative firms,” emphasized Kedia. With the surge in compliance rules, hedge funds that began with an EMS for trading are looking to add OMS features. For example, hedge funds that have 500 securities in their portfolio and need to run these lists through pre-trade compliance checks may not be able to execute more than a few lists per day. But if they run these same lists through an EMS, it could take a few split seconds, and they could almost automate the whole process, according to Kedia.
The idea of an integrated OMS and EMS (or OEMS) has led some OMS vendors to start to expand their OMS functionalities by integrating EMS-like features to create a next generation solutions dubbed OEMS. On the other hand, a few EMS vendors are working hard to incorporate OMS-like features into their existing EMS systems, and are on the brink of introducing an EOMS.
Among the desired features of an OEMS are synchronized blotters, just-in-time compliance checks and standardized workflows between the two systems. In response to regulatory pressures, an OEMS can also produce an integrated book of records and a real-time holistic view of exposures.
In the past, compliance checks were typically performed at an OMS level, and not much else was done in the EMS. Now this is changing, according to Kedia. Today, the EMS has more functionalities that were once associated with the OMS, including compliance, risk checks and regulatory checks. “I think that trend is going to increase,” he said.
It’s also possible that an order that passed compliance six hours ago is no longer in compliance. For example, say that a fund can only have 1% of stock, and that the trader enters an order for 100,000 shares, and it passes compliance. When the trader begins executing the order at 2pm, the price is $100, but what if the price moves up to $105? The order would fall out of compliance. With an integrated OEMS, compliance checks can be run continuously. If the trader has options tied to the equities, there is an interdependency of one position to another, so it makes sense that one system can do it all, said Kedia.
Overall, there are advantages to using one system as opposed to two. When “there are two disparate pieces of technology,” Kedia said, “You have to make them work together. Any time anything changes or if there is a break in one system, the other has to be accommodative,” he said.
“If clients are given integrated workflow, they are happy to use one system,” says Kedia.
History of the OEMS
Twenty years ago, the OMS mainly tracked orders that were sent to sell-side counterparties, and delivered an average price for end-of-day books. Traders were still handling single orders and calling up their sell side brokers. Then they needed to break up the orders across several brokers and venues. The OMS was not equipped to handle this, noted Kedia.
The OMS could identify the locations were the orders were executed, but it could not slice up orders, continued Kedia. Clients started with the OMS, then they got an EMS. “The OMS was not designed to handle fast trading and lots of slices and routing to brokers. This forced the OMSs to integrate EMS functionality. On the other hand, the EMS was focused on a narrow piece of functionality, and the features around the OMS were actually more complex. Now the market is asking, “Why do we need two systems? Why can’t we have one system?” said Kedia.
However, the convergence of these two systems is not going to satisfy all client segments. Most EMS vendors that are jumping into the OMS space are only able to provide a small subset of the entire OMS suite of functionality, notes Aite Group’s senior analyst Howard Tai. Thus, OEMSs tend to suit smaller hedge funds that are not ready for the full-blown OMS, stated the report.
With the complexity of managing multi-asset trading desks across global markets and time zones, market participants are bound to rethink the design of core investment management technologies, such as OMS and EMS, said Aite.
Even though the concept has been around for close to a decade, OEMS and EOMS rollouts are in their early days, reports Aite. Ultimately, it will be up to buy-and sell-side market participants to pick the platform that best addresses their business and trading needs.
This article originally was published on the FlexTrade FlexAdvantage Blog