Mostly… fixed income and cross product eTrading

October 15, 2007

What do you want an OMS for?

Filed under: etrading, OMS / EMS — holky @ 3:51 pm

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.


  1. Fascinating. Having always worked on the sell side I’m keen to learn more about buy side tech. I imagine that buy side firms do all their trades with their brokers & dealers by phone or on Bloomberg, TradeWeb etc.

    What proportion use single dealer Web channels like JPM Express, LehmanLive or DB Autobahn ? For which asset classes ?

    How many go to the bother of building FIX integrations to plug in to FIX quote streams offered by dealers ? Not many, I’m guessing…

    Comment by jos — October 17, 2007 @ 11:56 am

  2. Interesting article. Possibly worth adding its not just the vendors having to show flexibility in this area. A lot of EMS products are now owned by broker-dealers, who in turn are having to work with each other to produce ‘broker-neutral’ solutions and therefoe give access to their trading products via the platforms of their competitors.

    Comment by oxymoron — October 21, 2007 @ 9:06 am

  3. Next, watch for these “owners” of EMS product companies to finally start to enable/design these products for their own traders to use.

    In equities many of the “asset management” arms of these firms are just getting this technology on their PM’s desks and execution traders desks.

    In FX only one “universal bank” has this technology on traders desks and a few black boxes attempting to use this technology with some whiz kid system/formulas to handle flows in an attempt to “warehouse” these flows.

    For FX it works 51% of the time from what I have learned. In time the management of these firms will either refine them, shut them down (been done a few times already) or just take the cash and go to Vegas.

    Futures traders are perhaps the most successfull with these technologies and maybe thats why “TT” has had such a good run connected to these EMS systems.

    Next look for 2 other Universal banks to set up these systems for “spot” traders, “block” and “sales/traders” traders in equities, and perhaps even a treasury desk or two will chime in (doubtful-since this market is being eaten up alive by the likes of Citadel, GETCO, and others).

    Whatever the case as it relates to the above, these companies were excellent purchases/investments by the big firms (CITI-LAVA, LEH-REALTICK, ML-PORTWARE to name a few).

    Look for this technology to move onto “flow desks” in all products…YES especially deriv desks -CDS desks watch out!

    Also watch for buy-side traders to be hired back to banks for some huge money to get this technology up running on the desks and trading!

    Comment by lacidar — October 22, 2007 @ 12:28 am

  4. Just for clarity, in my mind a “broker owned EMS” is not really an EMS, it’s just a pipe to broker X plus a few of his mates. By EMS I mean “broker neutral” so it’s not owned by a broker.

    Comment by John Greenan — October 22, 2007 @ 1:58 pm

  5. OK, thats interesting, so here’s a hypothetical question, you install an independent EMS, committing a reasonable amount of effort and finance in the process, its then bought by an broker-dealer ( not an unrealistic scenario given the voracity the sell side have for these things), what’s your next move …?

    Comment by oxymoron — October 24, 2007 @ 7:08 pm

  6. Not a bad question, but the not really the right question. During the contract negotiations you insert a change of ownership clause. You then have walk away rights; that gives some comfort.

    The key thing is that you have to be a realist – when you are buying the system you accept the state of the world and can push the vendor (typical EMS vendor sales pitch at the moment is “here’s our system, what do you want it to do and we’ll build it”) but once you’ve signed on the dotted line it’s out of your hands. All you can do is minimise risk.

    A few years back JPMorgan IB bought Lava Color Palette (sell-side OMS) and then Lava sold to Citi. Not sure what happened there but I think that JPM put another system in.

    That’s life…

    But here’s another one back… You buy ANY system and the vendor it bought out. What do you do next? Think of Sungard and their prodigious appetite for buying firms, or SS&C and others. Having a vendor change ownership is not unique to the EMS space.

    If the new owners mess you around – walk away…

    Comment by John Greenan — October 25, 2007 @ 7:57 am

  7. Can’t argue with that sentiment.What I found interesting was that you were describing a system where someone other than the dealer and /or compliance had the final say over which EMS was used. My recent experience has been that, not only do buyside dealers have their personal favourites with an EMS but that when those dealers move, they expect to be able to use their pet EMS at their new place of work.

    Buyside dealing desk, with each dealer using a seperate EMS anyone?

    Comment by oxymoron — October 26, 2007 @ 10:24 pm

  8. The choice of EMS in an “un-connected” state is indeed normally down to the dealer – the dealer says “I want Inst-Lav-Real-Redi-Vest” and then it’s installed on the desktop. And that’s fine if you don’t mind re-keying or staging out of an OMS via FIX to the EMS and then back in.

    But in a more formally integrated system – to coin a phrase – the “enterprise EMS” the choice has to be made with the buy-in of dealing, compliance, IT and management.

    Comment by John Greenan — October 29, 2007 @ 8:46 am

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