FX: Order management systems come of age
OMSs are extending their influence across the buy and sell side, impacting the efficiency of broker-dealer sales desks and risk-management practices.
Order management systems (OMSs) have become a key component of a best execution policy, especially when used in conjunction with risk-management systems.
In Greenwich Associates’ recent report Moving the OMS Beyond Order Management, Richard Johnson, from the research firm’s market structure and technology practice, suggests the role of the sell-side OMS has moved beyond simply receiving and routing client orders to encompass all facets of the trade lifecycle.
He says systems are now required to provide compliance functionality and transaction cost analysis (TCA) to evaluate trading practices, provide report cards for clients and identify good destinations, liquidity providers and algos.
Rajiv Kedia, principal and associate founder of FlexTrade, goes even further, noting that OMS functionality now includes trader intelligence tools to identify potential contra parties for difficult orders, client profitability measurements to determine who contributes to the profit or loss and in what amounts and pre-trade analytics to identify difficult trades.
The sell side has been building systems and tools to internalize as much of its FX flow as possible to capture the bid/offer spread that would otherwise be lost to external platforms, adds Etrading Software managing partner Sassan Danesh.
“This internalization has created a demand for more sophisticated risk-management, client-management and order/trade flow analysis tools,” he says.
“A key consideration is how much risk the bank wishes to take on. Whilst riskless matched-principle trading provides some savings, larger efficiencies can be achieved by taking on risk for a limited period of time whilst waiting for a counter-trade to materialize.”
Such approaches require segmenting client flow into different liquidity pools and implementing different risk-management policies for each pool, explains Danesh.
For example, ‘toxic flow’ might be pushed into an internal liquidity pool that is suitable only for riskless, matched-principle trading, while flow from pension funds might be put into longer-term pools with greater appetite for the bank to wear some risk.
“Managing such complex segmentation policies requires significant enhancement of risk-management tools and policies as well as the underlying electronic order management systems,” continues Danesh.
“These systems are primarily built using a proprietary technology stack, but as such approaches become more common place, there are opportunities for standardized tools to provide the basic infrastructure.”
From a buy-side perspective, the most forward-looking firms are using a single platform for modelling, compliance, cash management and trade order management, observes Michael Markham, director at Markit thinkFolio.
The OMS typically holds the most up-to-date information on a portfolio and trading positions, but it often forms just one small part of the overall investment process. Firms can derive the most value if the OMS is part of a wider solution that covers these other important front-office workflows.
“For example, real-time information from the OMS can be used to support pre-trade checks and post-trade analysis to ensure compliance with client guidelines, regulatory restrictions and in-house mandates,” says Markham.
Simon Wilson-Taylor, head of EBS institutional FX, notes that asset managers are implementing increasingly advanced OMSs.
Markham adds that cash management is an important function within more sophisticated OMS platforms, enabling fund managers to view future cash amounts across accounts, including redemptions, unsettled trades and other cash flows.
“We are finding that many fund managers want portfolio modelling capabilities as part of the order management system so that they can perform benchmark comparisons and portfolio targeting to support better investment decisions using the real-time positions information that is available in the OMS,” he says.
So how does wider use of OMS impact the efficiency of broker-dealer sales desks and risk-management practices? According to FlexTrade’s Kedia, it provides the broker-dealer with a huge benefit as all the trading tools are available in one system.
“Brokers can evaluate trades, identify counterparties for block trading or optimize trading strategies using pre- and post-analytics, all while allocating and clearing from one screen,” he explains.
“With straight-through processing, traders can focus on trading rather than divide their attention across multiple systems.”
Risk management is also implemented at the source rather than after the fact and gives traders ample warning to restrict trading in case of risk-limit violations, concludes Kedia.
“A single OMS can address the needs of multiple desks, allowing firm-wide monitoring of risk across all desks in one location, while appropriate entitlements ensure that data can be viewed only by authorized personnel,” he says.