Often seen as a reliable tool that sits on every trader’s desktop, the Order Management System (OMS) has been a core part of investment operations for years. Yet we regularly talk to buy-side firms who think about retiring their OMS and replacing it with an internally built database or another tool. In this piece we look at how the concept of the OMS became popular, what problems it sought to address, how today’s complex investment environment is testing the capabilities of the OMS and the alternative solutions available.
Let’s start by looking at why you might have needed an Order Management System in the first place.
Data and processes are kept in two separate areas at investment firms - front office and middle/back office. Whilst the data sets needed between the two areas should be aligned, they often vary across disparate systems. This architecture can then lead to coordination and aggregation issues. Back office systems were typically designed as static processing and accounting systems; they were not intended to handle intra-day trading or other front office data. For example, in relation to trading workflow, there was no capability to implement different Financial Information eXchange (FIX) workflows. There were no real-time updates when algorithms sent back fills, execution traders could not quickly generate an order or bulk orders to get out to the market during volatile periods, and splitting allocations on grouped orders was almost impossible.
To solve these front office workflow challenges, and interact with the back office systems, the OMS was born. OMS’s were built to load Start-of-Day positions to give the trader a view of their positions. They were able to react quickly to market conditions with quick trade tickets, they could route grouped orders via FIX to several sell side execution desks and split the order into its corresponding allocation. OMS’s performed well in relatively simple, homogenous trading environments.
However, today the demands placed on a fund platform are no longer simple and trading environments are rarely homogenous. Competitive pressure dictates that trades are executed on venues, with placements and with algorithms that minimise costs. As firms expand into new areas such as alternatives and emerging markets they face pricing and liquidity challenges. Traders need confidence that the data they have at their fingertips is accurate, in real-time and takes into account all the economics of the trade.
Now herein lies the issue. Traditional OMS’s take in Start-of-Day holdings (quantity, price, average cost) and may also take in some cash information. If you are trading intra-day you are either investing or receiving cash – is this updated in real time? Are all economics of a trade captured and processed into your positions on a real-time basis? Are the commissions you pay the broker reflected in your cash balance? Are corporate actions included in the SOD holdings or are they only taken into account the next day because data is being processed late? It’s often that the data in OMS’s are just good enough to get through the day. Is just good enough still enough?
PMS (Portfolio Management Systems) were designed to handle the complexity around cash, investor reporting and settlement cycles. OMS’s were designed as intra-day books of record. The data to view actual positions and cash balances exists between the two systems but they often do not communicate well with each other, giving inaccurate data to both sides of the house. Imagine checking your bank balance and not knowing it was accurate as of 10 minutes or 10 hours ago.
So why are firms thinking of retiring their OMS systems?
- Traders need to know their intraday cash positions and projections
- There is still lack of clarity on intraday view of portfolio holdings and valuation
- Firms have multiple OMS and/or accounting platforms and they need a consolidated view
- Most firms operate with multiple regional start of day/end of day cycles.
- Data flow between Third Party Administrators or in-house systems is done via flat files using Secure File Transfer Protocol (SFTP).
With new technology and increased processing power, overcoming these challenges becomes easier.
Let’s look at another piece of technology the buyside has in its stack. The Investment book of Record (IBOR) has been around as a principle for some time now. Traditionally an IBOR held investments after they were settled and had no ability to record or monitor changes. Often seen as a tier 2 system, the IBOR flew under the radar for years. Until now that is. Today things have changed and the humble IBOR packs a punch.
IBORs can now handle a huge array of activities that would traditionally have been in the overpromised offerings of an OMS. Thanks to increased processing power and capabilities of SaaS architecture, an IBOR can deal with intra-day trades, capture the trade and settlement state, send or receive orders via FIX connectivity, model orders against benchmarks, and produce shadow NAV’s. From a MIFID II standpoint, an IBOR can book correct commissions and fees [important for compliance], connect to third parties such as custodians or fund admins and digest data from any source as well as connect to any source. For a firm’s middle, back office and accounting needs it can handle making adjustments, run pre, intra-day and post compliance, and powerfully reconcile against transactions, cash and positions.
Some solutions are API first meaning you can easily integrate and implement new business processes. Imagine if you could connect to a third part administrator via a common API. The build time to connect and retrieve your data reduces from 6 months to a matter of days.
Today, the ability to process vast amounts of data on a real-time or near real-time basis is possible. Some platforms can handle dataflow in excess of 6,000 times a second. You can’t get more real-time than that!
Technology also promises the ability to model against benchmarks or risk scenarios including intra-day trades (live positions).
Calling on big data to analyse trends has become easier. And as part of the investor protection framework within MiFID II, investment firms can now ensure they monitor commissions and research payments intra-day.
For anyone considering their technology stack and new investment technology systems, the challenge is to think two steps forward. Do you want to be in a place where control of your own data is merely adequate? Or do you want to have a system in which you have confidence in your position data, one that gives you full control of and most importantly, lets you truly own your own data?
If you're interested and want to find out more, we're hosting a webinar about the key drivers behind the demand for a live Investment Book of Record and the potential it can unlock with The Trade. You can sign up here: https://www.bigmarker.com/live-event/FINBOURNE-IBOR-TRADING-