Having been pretty much bang on with last post about Thomson .. Where next?.. here’s more from John.
Here’s a question that seems to be missed in the current market, where all talk is of OMS, EMS, OEMS and any number of combinations of an OMS and many EMSes. Let’s look at the history of the OMS and it’s younger brother the EMS and see what’s missing….
The modern OMS is generally regarded as being the offspring of Seth Merrin with Merrin Financial. The OMS became popular as a way to provide a system for the front office as a counterpart to the widespread usage of back office systems such as HiPortfolio, Pacer and so on. Originally the OMS simply replaced paper tickets; it provided a replacement for the timestamp and allowed dealers to store execution information based on telephone broker relationships and dealing.
At the same time as the OMS started to come into widespread usage so did FIX. The co-existence of the two is well documented – there is now no serious OMS that does not include FIX connectivity. But this parallel development was the root cause of the problems that are now facing the buy-side OMS world. Simply put, the buy-side OMS vendors had to have FIX in order to get through the RFI/RFP/ITT cycle and the buy-sides IT departments knew that they had to have a convincing story of being able to “do FIX”.Vendors scurried around for a story and often came out with the idea of partnering with a lead client that would be the first to go live with FIX – as the vendor coded up requirements from the buy-side. Alas it was a case of the blind leading the blind. The buy-sides had very little experience or knowledge of FIX and the vendors had even less. After several years of catching up the vendors are still behind the market in terms of functionality and the market is taking great leaps ahead with Algos and dark pools proliferating.
The problems of actually implementing FIX within a buy-side are well known by anyone who has done so – the micro level bugs and issues are compounded by a lack of testing infrastructure at the vendor and a lack of understanding of the workflows associated with electronic trading. So what happens in the larger buy-side? The course that many large buy-sides are taking is to buy an EMS and hope to remove the connectivity piece from the OMS – rather than put right the issues, give the problem to another vendor (or part of the same vendor). Let’s back track here a little. What is an “OMS”? Generally it’s actually three functional pieces and a shared data layer sitting upon a common database or real-time platform.Portfolio modelling / rebalancing / order generation – used by the Fund Manager Compliance – used by Fund Manager to ensure orders are compliant Order management – used by the dealer to keep track of orders sent to brokers by FIX/telephone/spreadsheet
Now, if a buy-side pulls the order management and dealing function out of the OMS and has an EMS perform this function then what does the old dealer order management piece do? In an EMS world it’s not unfair to say that the dealer piece is acting as an expensive piece of middleware – sitting between the Fund Managers and their modelling/rebalancing/order generation and compliance functionality and the EMS with it’s connections to brokers for execution.
So, ask the question: If you were a big buy-side looking to make a great leap in technology – would you rip out the dealer order management function and simply use an EMS at the front end?
Which firms are best placed to take advantage of that shift? And who can take advantage of their incumbent position to bend the will of the market?
There are a lot of unanswered questions in this market space but it’s one where vendors are engaging in a high stakes game to ensure that they come out on top. Right now, it’s a great time to be in a buy-side working on connectivity as the vendors in the market are jousting for business and are willing to engage in partnerships and risk sharing that was not on the table a few years ago.