Fund managers constantly grapple with ways to speed up their ordering process, to keep up with high-frequency traders who work in fractions of seconds across multiple pools of liquidity. They also grapple with ever-increasing recordkeeping and compliance requirements.
That means making tough decisions on systems. Specifically, order management systems, which track the results of trading activity, and execution management systems, designed to actually execute complicated trading strategies.
Among they key questions: Should they use one or both? Or, should they invest in a single platform, designed to handle both functions?
Regardless of their decision, fund managers must ensure that trades are executed optimally-meaning: at the least possible cost-and no mistakes also are made. In the process, the trades must meet the investment guidelines of the investment firms and recordkeeping must be accurate. In the end, the right investment must be made for the right fund.
Historically, the differences between order management systems and execution management systems have been as vast as those between a Volkswagen and a race car.
"The OMS performs back-office tasks, such as accounting functions, compliance reporting, portfolio modeling, allocations and commission management. Complex execution of orders is a secondary function," said Mark Israel, vice president of Sapient Global Markets, a global financial services consulting firm headquartered in Boston. "By contrast, execution management systems make quick automated trading tactics, customized transaction cost analysis and construct algorithms."
Some fund managers have decided to integrate their OMS platforms with their EMS. That integration can take two key variations, according to Israel. One is using linking OMS and EMS platforms from the same vendor; yet another is linking OMS and EMS platforms from disparate vendors.
But high-frequency trading is driving smaller and smaller trade sizes, on the order of 300 shares each. That's producing a blizzard of data. Consequently, a third choice is also emerging, said Israel. The OEMS, or order and execution management system.
Some order management system providers such as Charles River Development, Fidessa Group and ConvergEx have added EMS capabilities, while EMS providers such as Portware have added OMS functionality. Yet others such as Investment Technology Group offer both OMS and EMS platforms with a ready-made turnkey integration.
No one seems to agree which alternative is best, as the decision depends in part on the investment fund's objective. "If the more important goal is to actively trade orders on the market quickly, as opposed to using a broker's services, then its far more important to have a robust execution management platform with some OMS capabilities," recommended Roger Kahlon, buy-side account manager for Fidessa in Boston. "However, there are some cases where an order management platform with trade execution capabilities might be sufficient."
Those cases, Kahlon said, include a fund manager needing to ensure correct financial analysis and modeling correct or internal workflows for allocations of trades to multiple accounts. Yet another scenario, when a fund manager needs to manage commission budgets and compliance while directing most of the trade flow to the brokers' desks.
"High frequency traders are unlikely to want compliance modules and allocation features on their desktops," said Matt Samelson, principal of Woodbine Associates, a Stamford, Conn.-based capital markets research and consulting firm. "It is unlikely an OMS would ever meet their needs."
For fund managers to enjoy the best of both worlds, using a single vendor to provide blended order management and execution management capabilities may be far more efficient-and less error-prone-than cobbling together two disparate systems.
"There is a guaranteed seamless workflow from the compliance and trade allocation process to the execution management process." said Jeff Gavin, director of product management for ConvergEx's Eze Castle Software. "They also both rely on the same underlying market data."
To others, even the most sophisticated OMS systems can't possibly go far enough in accommodating a fast-paced trading environment. ITG, which maintains separate OMS and EMS platforms under one roof, doesn't need to stage orders from its OMS to its EMS because even though the two systems remain separate they have full "trading integration" according to Mark Wright, managing director at ITG.
Yet the best of breed approach may just win out, he conceded. That's because there is more than just functionality involved in the decisionmaking process. "Although integrating systems from two separate vendors seems to be the most efficient option, there are multiple parties in the equation," explained Wright.
Those are the portfolio manager, trader, compliance director and IT director. "While the IT director is responsible for actually installing the OMS and EMS platforms, the portfolio manager, trader and compliance director are deciding which OMS and EMS system to use," Wright said. "The portfolio manager and compliance director will likely have a favorite for OMS while traders are far less concerned about OMS platforms and want to ensure the best EMS. ''
Bottom line: It is more operationally-and politically-difficult to replace an order management system. So it is likely an investment firm will keep its OMS, but change its EMS platform more frequently.
"The phrase OEMS is really aspirational," Wright said. "It sounds like the Holy Grail, but every platform has its strengths and weaknesses. OMS and EMS are two distinct functions."
Indeed, a survey conducted last year by the Tabb Group of 118 buy-side firms which showed that despite the workflow and cost efficiencies that may be realized with an integrated OMS and EMS, the trend is far from universal.
Firms that trade moderate volumes may be attracted by the seamless workflows, high-volume firms are more likely to keep the systems separate due to execution latency concerns, according to a report issued by analyst Kevin McPartland.
"Ultimately, EMS's and OMS's perform two distinct functions, and while Portware Enterprise offers certain elements of OMS functionality in its system, it remains an event-based execution platform, not a database-centric OMS," said Harrell Smith, head of product strategy at Portware.
Although the firm is able to incorporate clients' compliance and workflow logic into its execution management system, it is not a full-fledged OMS system, so the latency of the EMS system is not affected.