Order Management Systems Take Centre Stage

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Byline: Heather McKenzie

The fewer people who have to key in trade information, the fewer opportunities for error. That is the basic principle driving the adoption of order management systems (OMSs) at investment banks. The increased automation of the trading lifecycle and the quest for straight-through processing (STP) in the past few years have made these systems much more attractive to financial firms.

They have evolved from basic trade creation and management workflow to encompass myriad functions such as execution, order routeing, confirmation, accounting, allocation and network connectivity.

Fritz McCormick, analyst at US firm Celent Communications and author of the report Ranking the Vendors of Sell-Side Order Management Systems, says: 'The OMS is being seen as the new pivot point for internal and external STP.'

John Wilson, director at CityIQ, a London securities industry consultancy, says the establishment of central dealing desks by investment banks has led to increased use of order management systems.

'Once that central environment was established, it became much easier to introduce an OMS,' Wilson says.

The basic purpose of an OMS is to enable order capture at any given point, be it a sales desk within an institution that sells over the telephone or, as is increasingly the case, a screen-based system supplied to clients by investment banks.

Greg Johnson, sales director at GL Trade, the financial trading software developer, says: 'At the front end, an OMS should have the ability to capture orders at the point of initiation, route the orders to trading desks and then enable the order to be put into the market.'

Moreover, the OMS should then enable clients to receive fills in real time.

The centralisation of dealing has enabled more complex trading scenarios to be applied. This, in turn, is placing emphasis on OMS to handle more of the trade flow.

'The OMS should help the dealer to perform routine tasks, allowing straightforward orders to zip past the dealer and hit the market without interference. If you automate the clean and simple stuff, the dealer can concentrate on the more complex trading scenarios,' says Wilson.

Beyond the front office, a good OMS should enable investment banks to reduce the high number of back office and settlement staff in proportion to the money earners at the trading desks, says Johnson.

Growth in equity order flow is creating an environment in which OMS vendors must provide connectivity and smart order routeing features to meet customer demand, says Celent's McCormick.

'Where alternative trading systems are further fragmenting the market by creating multiple execution points, OMS solutions are moving into the fray, in many cases with new functionality, in order to keep buyside and sellside firms abreast of all possible execution points.

'Without such systems, best execution as a concept is all but lost,' he says.

Globalisation is creating additional complexity. Many view the OMS as an important factor in solving the problems of multi-currency and language support for execution and accounting, as well as cross-border trading, clearing and settlement, says McCormick.

GL Trade's Johnson agrees that globalisation is an important issue. He says: 'Markets are now global and investment banks need to ensure that all the locations of the institution are kept in touch in order to take advantage of internal crossing opportunities, for example.'

An OMS can also ensure that traders operating in different branches of an institution do not exceed set limits.

McCormick identifies a number of functions that an OMS should offer, including order routeing and connectivity, position-keeping, compliance, auditing and risk management.

With the increased trading volumes on electronic communications networks and alternative trading systems, order routeing has become crucial as sellside firms take their business to a growing number of alternative destinations in order to find best execution. …