This is the first of a multi-part 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.
An Order Management System (OMS) is a software application for facilitating and managing the order and trade flow between the (buy-side) client and different execution venues. The client normally sends orders to the sell-side (intermediary, typically a broker), using the FIX protocol. Order Managements Systems are employed both with the buy-side and the sell-side, where the more complicated set up is found at the latter.
OMSs first appeared as a natural outgrowth of electronic equities trading. With increasing order volumes, traders needed better support for managing the agency order flow in an efficient and cost-effective manner. The solution to this technology-created need was obviously to add more technology; the OMS, which became the hub that structures the inbound order flow and enables traders to route orders and to track trading activity and the progress of each order for various types of securities.
The OMS performs vital functions such as allocations, position management, and communication between portfolio managers and traders. It ensures that orders are updated, reported back to the client and sent to mid/back office. An Execution Management System (EMS) is designed to display market data and to provide seamless and fast access to trading destinations for the purpose of transacting orders.
In contrast to an OMS, an EMS is focused on real-time trading, real-time market data, and analytics. An EMS typically offers the capability to manage orders across multiple trading venues, including exchanges, brokerage firms and alternative trading systems, sometimes with algorithmic support. Both types of systems have grown far beyond their roots. And while an OMS can operate separate from or without an EMS, large efforts have been made over the past decade to integrate these two functions.
OMS-EMS integration was initially limited to FIX integration and drop copies of trades going from one system to the other, whereby the trader manually attached the trades to the corresponding order. Automated staging from the OMS into the EMS allows trades to flow more seamlessly, increasing update rates and accuracy. From the introduction of multi-market trading with fungible instruments and automated trading using execution algorithms, order flows have become increasingly complex, with splitting trades across multiple venues, aggregated orders, orders with pending allocations, pairs, contingent orders, baskets, order programs, multiple orders from different clients in the same instrument. They all need to be managed and executed, which calls for a tighter systems integration.
But in many real-world integration scenarios, legacy issues will appear.
The EMS platform is likely newer, and often provided as a managed application service. This may preclude a tight integration with an older OMS or other trading applications that are deployed on-premise. One of the great “architectural” issues in the OMS/EMS space deals with integrating and migrating trades from front-end execution to back-end clearing and settlement — to manage trades throughout the trading process.
Most software providers have taken a compartmentalized approach to this process, focusing on one aspect of trading, for example, trade execution or order management. However, this philosophy is rooted more in technological capability than in trader needs. The critical issue underlying the discussion is not which system is the best, but which solution that addresses workflow seamlessly without commingling different applications.
In the next post, we will look further into new functionality required from the next generation of OMS/EMS platforms, and the key drivers behind their development. Not surprisingly, regulatory change is one, while another factor is the growing reliance on multi-asset class trading strategies.