This is the second part in a series that explores the past, present and future of Order Management Systems (OMS) and the closely related Execution Management Systems (EMS). We cover these trading tools mainly from a sell-side perspective.
As financial markets change, new demands on trading technology appear. This includes the functional requirements of the OMS. The original basic purpose of the OMS, to facilitate order management throughout the trade cycle, remains the same. But today, much more functionality is needed to provide this support, and to match the growing complexity of trading. The performance requirements have also increased, with low latency execution seen as a tool for gaining competitive advantage.
Fragmentation of markets, fueled by new market regulation such as MiFID, is a major driver factor in how increasingly complex trading practices surfaced. Finding liquidity and cost-efficient execution against that liquidity became an essential requirement from firms. Trading technology vendors responded by adding new functions such as Smart Order Routing and execution algorithms to their OMS products.
Enter MiFID II
Few market regulations have been as ambitious as MiFID II. The updated EU framework will extend regulation into new asset classes and also rectify some of the unintended consequences of the present regulation. In several areas, MiFID II goes into greater detail than its predecessor, with added measures for record keeping, reporting, transparency and risk control. The regulatory framework also expands coverage into new asset classes, which to some extent have been unregulated, at least from a Best Execution point of view. For instance, Fixed Income trading will experience considerable changes.
The sell-side must also address the unbundling of research services, as fees will be separated from execution or brokerage. This will put the current business models for many investment firms to the test. In an unbundled world, buy-side clients may execute with one counterparty and receive research from another. Attracting order flow will come down to the ability to meet regulatory requirements, such as best execution, and to continue improve on cost efficient execution to compensate for the higher overhead.
A well-performing OMS will be an essential tool for achieving this, which requires a comprehensive functional upgrade to match the new market structure and regulatory requirements following from MiFID II.
The broader scope of regulation also suggests that a new generation of integrated EMS-OMS platforms will appear, which should attract many firms.
Expanding trading technology stack
Another important factor to consider is reliability, which hinges on the quality of the technology that constitutes a broker’s trading infrastructure. Today, this consists of interrelated components such as FIX engines, order management systems, market data platforms, smart order routers, algo engines, and more. As systems are becoming more complex, each additional component in the trading technology stack represents a potential source of latency or failure – scenarios that could impact execution and, in turn, cause clients to defect to another broker.
The gradual influx of technology has left many users with legacy issues; multiple systems which continuously need to be either integrated or updated. Instead of employing multiple systems integrated via FIX, next-generation OMS-EMS solutions should offer new architectures to enable deeper and seamless integration. This stems from both performance/latency issues and user requirements on usability and workflow.
Key requirements of a future-proof OMS-EMS:
- Status monitoring of each order for both high and low touch flow (DMA).
- Database integration to allow clients to keep track of MiFID II parameters such as LIS-thresholds, SMS, liquidity classification and capped/non-capped
- Facilitates compliance with requirements on storing, analyzing, monitoring and presenting
- Enables easy add-on functionality (within a unified software platform), such as:
- Pre-trade risk
- Transaction Cost Analysis
- Advanced Trading allocation
- Composite order management and execution
- Program/List trading
- Pairs/Spreads monitoring and trading
- Market Making and RFQ responsiveness
- Inbound FIX (request view)
- Smart Order Routing
- Execution algorithms
- Algo/order performance monitoring
- Integration into Mid- and back office systems
- Tight integration between components. The user should view it as a single system with add-on functionality easily enabled by permissions.
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