Many asset managers are wrestling with the decision on whether to keep the order management system (OMS) and execution management system (EMS) as two separate best-of-breed systems, or switch to a single unified platform known as the OEMS.
Buy-side firms have been demanding tighter integration between their order management and execution management systems for years. Some are looking to consolidate their trading platforms to drive down costs. Others want a single platform to reduce the complexity of trading across multiple asset classes and geographies.
Some critics contend that the OEMS has not lived up to the hype of creating a synchronized blotter and a complete audit trail in both systems. They argue that it’s been difficult to pull data from the OMS into the EMS or visa versa.
“The debate on whether the OMS and EMS should be merged or integrated continues to rage,” wrote James Wolstenholme, senior analyst at Celent in a report published Oct. 25, 2017.
As the debate rages, the interaction between portfolio managers and traders is becoming more critical to earning incremental returns, stated the report. With assets shifting from active to passive investments, portfolio managers are relying on advice from quantitative tools – like pre-trade transaction cost analysis – to earn precious basis points.
There are 15,000 financial advisers in the United States, ranging from $5 trillion in AuM all the way down to $5 billion, and then there’s hundreds under $10 billion and then family offices with $100 million in AuM that need a complete investment life cycle, said Wolstenholme in an interview.
For many asset managers, the choice between integrating a best-of-breed OMS and EMS, or migrating to an OEMS, hinges on multiple factors and is by no means black or white.
“The best-of-breed EMS and OMS tends to go with the separation of asset classes and geographies,” said Wolstenholme.
In the case of an asset manager trading a majority of credit bonds and associated derivatives, the firm won’t specifically need a high-speed EMS, according to the report. In addition, the same firm investing in commodities, real estate, direct investment, or private lending, might use a specialized second OMS.
“One size doesn’t fit all, and so now as you move down the different AuM levels, some firms are going to want best-of-breed and are going to go across many multi-assets and geographies. Therefore, one behemoth system is not the answer,” said Wolstenholme.
If a hedge fund is investing in specific, highly liquid asset classes, and dealing in high volumes, then “the idea of an integrated OEMS is a better architectural method to follow,” said Wolstenholme. For example, a hedge fund that tends to concentrate in North American equities and is doing a high-frequency trading strategy or market neutral strategy, “that efficiency is gained within the combined OEMS,” he asserted,
Different Segments and Workflows
“Generally speaking, you can break the decision down into two client types — the institutional management space and the hedge fund space,” said Aaron Levine, vice president of FlexONE OEMS Solutions at FlexTrade.
Hedge funds tend to have different workflows than institutional asset managers. “Specifically, the interaction between PM and Trader can be seen as one from the systems perspective.”
The OEMS avoids the “swivel chair” concept where the PM is going into the OMS to create an order, running allocations, order marking, checking locates, and compliance, and then sending it over to an EMS and executing it there. “If the same person is doing both, they want all the functionality in one system,” said Levine.
“An OEMS equates to an order-entry workflow that allows you to do everything in one shot,” he said. A portfolio manager who never wants to leave the OMS, can see their positions, real time P&L, monitor exposures and slice and dice the portfolio in the OEMS. The trader can create orders from the OEMS, run compliance, stage the orders, and then route them to execution venues or actively manage the orders through algorithms.
Workflow & Order-Origination Are Keys to Decision
“Not everyone needs speed. It’s about order origination,” said Levine referring to the decision. In both cases, a PM originates the order, but how an order is communicated to the trader and input into the system is quite different. At many hedge funds, the PM still sends orders via emails, chats or via voice to tell the trader what to buy from a single stock perspective, said Levine.
Larger asset managers and plenty of hedge funds have traditional workflows, where multiple PMs are sending orders to a centralized trading desk, with a Chinese wall in between, he said. “They have two segregated workflows, two segregated users and two systems. In that scenario, they don’t just use one system,” said Levine.
Avoiding Bottlenecks in the OEMS
To arrive at a decision appropriate to each firm’s needs, Wolstenholme said it’s crucial to perform a gap analysis, which includes size of AuM, assets traded, investment mandate and liquidity.
“The idea of combining a very complex organization of multi-asset trading into just one system is a little too idealistic,” asserted the analyst. “In the real world, firms definitely have to segment and layer their different applications,” he advised.
Painting a complex picture of all the layers of applications that exist in an asset management firm, the report explores whether asset managers’ OMS/EMS and portfolio management system layers should be merged, and examines what is the best architecture for asset managers to adopt.
“If an asset manager moves up to a specialized EMS for routing capabilities, and is putting TCA on top of that for a specific market, I would not combine that with a full order management system that is dealing with fixed income, FX, private equity, and direct investments,” he said.
“There is going to be position data and derived data that comes off the atomic data, and that is going to become too specialized and too heavy a weight to store in a single object- oriented type of model,” he cautioned.
Data Replication: Possible Problem?
“Ultimately, we are talking about transactions and positions,” said Wolstenholme. For example, there are specialty applications such as TCA and performance attribution, funding and collateral management that produce derived data.
“If someone is doing TCA on top of the EMS, they’re going to need all of the fill information in real time because it might dynamically change the way they’re trading in terms of liquidity and transaction costs,” said Wolstenholme.
But these specialty applications can lead to duplication of data, which is okay as long as they are kept in synch, said Wolstenholme.
As long as the data is kept ‘in synch’ through a service-oriented architecture (SOA) and multiple instances of data, then maintaining the best-of-breed OMS and EMS approach is going work, said Wolstenholme.
Keeping Data in Synch
“File transfers with drop copies of executions and execution fills [via FIX) were the main means of communications between these separate applications,” according to Celent’s report.
This has been problematic, agreed Levine. “FIX is an orders/trades-based protocol which does not encompass all of the OMS/EMS needs such as compliance, allocations, positions, etc.,” he said.
Today the OMS/EMS or the unified OEMS can be kept in synch through APIs, said Levine. For example, FlexTrade uses a gRPC API framework for the OEMS integration that includes all aspects of the order life cycle; order marking, allocation logic, compliance, locates, and routing. “It’s the connectivity between the two systems that creates an OEMS,” said Levine.
Looking ahead, demand for a more consolidated OEMS is expected to keep growing, as firms see this as a way to lower costs rather than operating disparate platforms.
However, many traditional asset managers and some large hedge funds prefer to stay with an integrated best-of-breed OMS/EMS model. “We’re living in a best-of-breed world,” said Levine, noting that both arguments are valid depending on the client type.
According to Levine, having both a best-of-breed EMS that caters to the asset management community and a high powered OEMS specific to the hedge fund community offers clients the ideal choice as the evolution of the OMS/EMS continues.
“Obviously there is no silver bullet,” said Celent’s Wolstenholme. It’s all an incredibly detailed integration, and it depends on gap analysis of what the asset management firm is doing today, what are their investments today, and where they want to grow. And then it’s being able to match the right architecture and vendor systems to do that,” he said.
Sometimes, it might be a combined OEMS, or it could be a separate OMS and EMS, but it certainly isn’t one answer for all.”