CutterAdvantEdge

Issue 52, August 2007

The OMS Identity Crisis

According to theorist Erik Erikson who coined the term, an identity crisis is a time of intensive analysis and exploration of different ways of looking at oneself. Cutter Associates is seeing a fair amount of this self-evaluation from order management system (OMS) vendors as they struggle with where they fit in today's marketplace. Some vendor products have stayed close to their roots while others have expanded to include a wide variety of functionality.

So what does an order management system look like today? Or perhaps, more significantly, what should it look like? As the OMS has become the centerpiece of the trader's desktop, users have demanded more functionality within it, as well as unspoiled integration with a variety of third party products. In other words, they want it all and they don't really care where it comes from - just so long as it is fast, reliable, and robust.

Beyond the trading desk, the OMS has proved valuable to portfolio management, compliance, trading operations, and firm management. All of these constituencies have been overwhelming vendors with enhancement requests and, eager to please, many vendors are exploring ways to expand their products.

What can you find in an order management system today?

Multi-asset class support

While most of the OMS vendors offer support beyond traditional equities, they continue to struggle with fixed income and derivative securities. Some of the vendors have made progress on the unique workflow issues for the fixed income manager/trader. But for complex derivative securities, vendors are not supporting much beyond the basics of trade capture. While the vendors are working diligently to add more functionality, there are few who can truly support multi-asset class portfolio management, trading, and compliance.

Sophisticated rebalancing tools

Today's OMS goes well beyond modeling an equity portfolio against a set of percentages. Tools include rebalancing all or part of an account(s) against some set of limits whether they be security, sector, duration, or yield-specific. Flexible user interfaces allow the portfolio manager to organize their portfolio views in any number of configurations and drill down to details. Compliance-aware rebalancing is becoming more widespread - why have the rebalancer generate orders that cannot be executed?

Compliance

For some of the vendors that have origins in compliance, they have added flexible user-friendly interfaces to accommodate the Compliance Officer who does not need to be bogged down in some of the trade details. Other vendors have begun developing more robust rule-writing tools. We're also beginning to see the concept of "continuous compliance" checking throughout the trade lifecycle rather than just at discrete points in time. As a value-added service, a few vendors maintain a current library of global regulations, including detailed rule interpretation and implementation.

Trading tools

The trader interface has never been more flexible and appealing. With new technologies, OMS vendors are able to provide users the configurability options and attractive data views that they have been searching for. Traders are pleased with the reduction in keystrokes and clicks to complete basic trading functions, not to mention the number of tools at their fingertips to support more complex trading strategies. The integration of liquidity access, third party pricing, transaction cost analysis, and other analytics into the blotter allows them to focus their attention on a single application for all trading needs.

Execution management

The recent chatter in the press concerns the appropriate boundaries between the OMS and the execution management system (EMS). Buy-side firms consider broker-neutrality to be a critical issue yet recent Cutter research indicates that the most widely used EMS applications are provided by brokerage firms. Perhaps because there are so few (and getting to be fewer) vendors today that are not linked to a brokerage service. Should the OMS vendors be developing proprietary EMS functionality or focusing on integration of third party applications? Well, in fact, some vendors are proceeding down both paths. However, it is our belief that the trader is not overly concerned about where the functionality comes from or what it is called as long as it does the job - getting them data and liquidity access FAST. (For more detail on Execution Management Systems, see the February 2007 Cutter AdvantEdge.)

FIX services

Several of the OMS vendors are now providing a value-added service to their clients in terms of certifying and maintaining FIX connectivity to liquidity partners. These are becoming more commonly used as managers look to offload non-core competencies.

Post-trade processing

Order management systems have come quite a distance from the days of exporting a flat file and washing their hands of the downstream effects. In fact, now vendors are providing real-time messages to the most common industry settlement utilities and taking responsibility for the results. They have developed workflow tools to assist in delivering messages, acknowledging responses, matching, and reconciling trades among trading partners. Again, this is a case of the OMS picking up more of what was once the work of external systems.

Performance measurement and attribution

The OMS vendors claim that their users are asking for it, so why not build it? That is, GIPS-compliant performance calculations and security attribution analysis right on the trade blotter. The OMS vendors are pushing up against the historical boundaries and positioning the OMS platform as the hub of the investment organization - being all things to all users.

This breadth of offerings comes at a cost. OMS vendors are playing in a very competitive market and the wider their focus, the more difficult (and expensive) their product becomes to implement and support. As vendors broaden their offerings, there has been some loss of quality when it comes to the core product - more breadth than depth. This has resulted in some opportunities in the marketplace for new players to specialize in one of the above components. As FIX and XML have taken hold, messaging between modern systems has become more standardized so integration between best-of-breed vendor applications may not be the hurdle it once was.

It may be time to sit your OMS vendor down on the therapist's couch and help them get a grip on this identity crisis. Who are they? What do you want them to be?

Cutter Associates will provide a detailed update on Order Management and Compliance Systems on October 11 and 12.