We have been writing about the debate over integrating the order management and execution management systems for the past five years. And still the issue is unresolved. Advanced Trading recently published its September Digital Edition on the OMS and EMS, and I am struck by the divergence of opinion on the topic of integrating the two systems.
For now, it looks like EMSs are proliferating on buy-side trading desks, as they are valued for their high-speed connectivity to venues, fast access to real-time depth-of-book market data and their ability to integrate broker algorithms more quickly than their OMS counterparts. And the EMS, often implemented as a hosted solution over the Internet vs. the in-house, multi-server installation of an OMS, is able to help the buy side take control of their order flow, with less technology overhead.
With the explosive increase in high frequency trading, smaller order sizes, exponential volumes of data to process, and fears of black box traders possibly front running large institutional orders, buy side firms obviously need the nimble EMS to execute algorithmically, or to hunt for dark liquidity, and yes— speed does matter.
Any attempt to integrate the OMS and EMS, they fear, will slow down the EMS. "Order management systems were not particularly developed when electronic trading was the mainstream," says Ary Khatchikian, presdient and CTO of Portware, a leading EMS provider. [For] Portware, on the other hand, electronic trading was part of its birth. We had to be high frequency, make sure we were efficient and high performance," says Khatchikian. "There are both the challenges of being able to store or transact many thousands of messages. We accommodate these types of systems," says Portware's CTO referring to OMSs. "We reduce the total amount of messages that go back to the OMS, or send them back in batches, less frequently," he says.
But the issue is far from settled. "Firms are running four, five and six different EMSs," said Gavin Little-Gill, global head of asset management product strategy at Linedata Services, an OMS provider, in an interview at the SIFMA Financial Service Technology conference in June. "People are no longer comfortable," he added, suggesting they "lack control over multiple EMSs," and that the trend toward platform "rationalization" is coming. "The Nirvana is a single platform integrated with compliance that has tight integration with portfolio management process and compliance," insists Little-Gill.
According to Rob Keller, managing director, global product management at ConvergEx, "The problem with the EMS is it doesn't check compliance and it doesn't have all the allocation functionality that an OMS has — one consistent audit trail from compliance all the way through settlement." For instance, if a trader verbally receives an order and enters it into the EMS, it doesn't go through compliance.
While buy-side traders acknowledge the speed issue, they have seen improvements in the OMSs and note that several vendors, most notably, ConvergEx has had success in integrating the EMS functionality into the OMS blotter. For instance, ConvergEx added a "bump button and Level 2 data and separate functions you'd find in the EMS are tightly coupled with the OMS," notes Keller. A bump button allows the trader to bump up or down prices— up a penny, or quantities — up 100 or down 1,000. It also lets them do a quick cancel/replace in the market, such as when a new limit price comes in. Keller insists that his firm has also addressed the data processing issue. "Processing of fills was a bottleneck four or five years ago. Now we're processing thousands of messages per second. But before, it was much slower than that," he admits, noting the [acquired Eze Castle] OMS was more database centric, whereas now, ConvergEx has everything in memory and cache.
Other OMS providers, such as Charles River Investment Management have built their own EMS into the OMS, while Fidessa is working on integrating its EMS with the LatentZero OMS. Linedata is also working on Longview live, a neutral interface to multiple EMSs. The first generation of the product is with a dozen clients, according to Little-Gill. The next generation is due out in Q1 of 20100 and will contain mashups of different destinations, algorithms and dark pools I spoke to one consultant who advocates the integration of the EMS into the OMS after he observed the frustrations of a large pension fund client dealing with multiple EMSs on the desktop.
Stefan Besterman, manager, banking and real estate group, at LECG-SMART, a business advisory services firm, recommends the integration of both the OMS and EMS systems, even if that adds a few minutes to executing trades in fast markets. "The buy side wants one system and would like to have an OMS that actually contains the same functionality as the EMS, or visa versa," says the consultant. He doesn't care if the OMS adds an EMS extension or the EMS builds in the OMS features, just as long as functionality is added that the buy side wants.
Looking ahead to the future, Besterman contends there are three critical pieces of functionality that the buy-side needs: First, compliance and error checking are essential. "There's very limited error and compliance checking in the EMS side and these tools are very light and very thin," contends Besterman. Second, he suggests adding in the ability for the buy side to develop their own algorithms. "There should be a sandbox to allow buy side firms to develop and test their own algorithms...It's hard to gain competitive advantage using an algorithm that 500 firms use," he asserts. Also, the buy side lacks a way to compare the performance of Algo #1 vs. Algo #2 or Algo #3.
"A lot of people are taking it (performance) on blind faith from a room fill of PhDs on the sell side," he says. Third, asset managers running individual accounts should have tax-lot trading including inventory relief methods. Since firms on the buy side are long term buy and hold investors, they are buying securities and selling them off, so that if they want to reduce their holdings in a certain security, they'd like to get rid of the securities they bought at the most expensive level, first. "Automatically, the system would know if you bought 100 shares IBM at $100 and 100 shares at $150, it would know to sell off the second lot first, because you'll book a profit of $50, so you're tax lot is lower," says Besterman. He also suggests that the combined OMS-EMS have built-in crossing functionality, so that if different portfolio managers are buying and selling the same security they could do an internal cross. Today, when it gets to the EMS doesn't see that these trades net out," he adds. "They may be executing a lot of sells and buys, when they could have done an internal cross," says the consultant. In some cases , portfolio managers in different parts of the firm do buys and sells where they could have done a single transaction by netting and crossing," he adds. One buy side trader believes the integrated OMS-EMS of the future will materialize and it will work similar to the way that Liquidnet's crossing network can scrape orders off the OMS blotter.
While the dream list of functionality for the combined OMS-OMS is growing longer, it will be interesting to see how both systems evolve and whether the OMS can keep up with the EMS or join forces.