Current market trends indicate a shift in the dynamic of front office technology where questions about risk, cost, and operational efficiency are more prevalent, and technology stacks are far more scrutinised. Are we as a fund going to do more with less? Going with the best of breed approach? Or perhaps consolidating onto one platform? Can we improve our operational efficiency? What is our integration risk?
One piece of this ever-growing puzzle that provokes controversy is the traditional relationship between the PMS and OMS and its potential to be torn asunder. To explain this and why it is essential and becoming increasingly more interesting to see, it would make sense to go back right to the genesis of the software, adopting a simple and mostly accurate view. One thing is sure, since the genesis of the PMS, volumes, data, compliance rules, regulation, and the levels of sophistication in electronic execution have all exponentially increased.
At first, there was the PMS (portfolio management system)
The ledger came first, original paper records of inventory meticulously maintained by the back office. During the digital ‘revolution,’ which coincided with the re-emergence of hedge funds in the 1980s, volumes of data exploded with trading volumes, and the requirement for more sophisticated tools arose. This was the origin of the IT Portfolio Management Service. The ‘advanced’ management of the One’s and Zero’s, vital to the lifeblood of an asset manager or hedge fund, pushed for the creation of these ‘accounting’ platforms. The spreadsheets (Excel or ledger) made way to systems specifically designed for that function.
From the PMS came the OMS
Pretty soon, the rise of data consumption and storage required an ever-increasing amount of processing. The front office was rapidly electronifying, and the requirement for a system to be able to review and monitor positions became not a luxury but a necessity. Systems had to cope with new regulations, the electronification of compliance, and the increased burden of electronic execution. These Order Management Systems (OMS) were at the pinnacle of the buy-side operations. That is until the almost complete ‘electronification’ of workflows came about. But, the limelight was about to be shared.
The Birth of ‘proper’ execution, the EMS
It is worth pointing out that the approach of hedge funds and asset managers has been different. Whilst both the PMS is vital and the core of operations, the OMS has taken on a slightly different role. Given the different requirements (of which there are many), both organizations had different approaches. A hedge fund would be content to have a separate PMS and OMS, whilst for many long-only asset managers, the systems were the same vendor.
The PMS had been pushed firmly into the back office, and the OMS was the ‘front office,’ with a considerable amount of the trading done verbally. Roughly 20 years ago, there was another explosion of data and a marked increase in the need for multiple sources of liquidity, speed (to market), and data processing. Enter stage right, the execution management system (EMS), which is faster and better looking than their OMS progenitors. These ‘fly-boys’ gave the more tech savvy traders something to prove their mettle. At last, a tool solely for the front office with all the flashy lights and visualisations that make an investor stand up and take note.
Now that we’ve had the brief and mostly accurate history of the systems, the tie-up between PMS and OMS set the scene for years to come.
What’s happening now
Performance is everything. Every penny is being pinched and scrutinised, and this only means one thing: systems need to justify their purpose. Due to regulation shifts, there has been yet another significant spike in data. The amount available to consume and required to be competitive is massive.
There is also a drive for traders to do more. Whether that is more asset class coverage or consuming data to provide information to the portfolio managers, their role is different. Therefore, the role of the system needs to be different. From its origins, the OMS was closely linked to the PMS. It served as the bridge from the front to middle and back offices. A fund would use an OMS to trade from if the trading was vanilla and an EMS on top if it was complex.
The role of the EMS had pushed the OMS further towards the PMS tie-up. But with everything (above) going on, a shift had to be made for traders to do more and stay relevant while gaining access to real-time positions, compliance, and fund level detail. Ensuring that there was no unnecessary slippage or loss of orders, orders were getting to market quickly while simultaneously tracking trading volumes, performance, and market movements.
This meant that the EMS’s started to encroach further and further into OMS territory; some even built their own solutions. It’s not surprising that vendors have been trying to develop all in one solution for years, with varying degrees of success, but the question is whether they need to. Moreover, do those PMS users need to see what’s going on in the OMS?
As long as the information is fed correctly to the PMS from the OMS, then the need for the ‘all-in-one’ is diminished, and the very different requirements, for now, do not necessitate the full blown everything-in-one solution. That is not to say the nirvana system is not worth it, but only if the same level of performance can be achieved. The best, most performant OMS’s are wipe and load as they can be fast, nimble, and update with real-time market relevant information. Not to mention that any EMS that isn’t wipe and load is likely to have massive performance issues.
Because the PMS is a central data repository, it needs to consistently access and process large static data sets. If your OMS and your EMS are better served being wipe and load, where exactly should the tie-up be?
Don’t take my word for it; take the market’s view. The trend for a fully integrated EMS and OMS (now called the OEMS) is becoming much more prevalent. This leads to a higher level of interoperability, with order generation and portfolio rebalancing moving very close to the execution process itself, thereby reducing trading errors and hence a massive reduction in critical operational risk.
It also means that where the front office has typically had multiple systems, they now only need one, whereas the PMS remains vital to the back office. This is what the more tech savvy COO’s and business focused CTO’s are realising. Yes, your order flow may be simple, but will it always be that way? Given the issues that exist with a POMS, how do you scale your operations to remain competitive? It seems that more forward-thinking COO’s and CTO’s are realising that implementing a proper OEMS can save millions of dollars in implicit and explicit costs.
The conclusion is that while the nirvana system ideology has yet to be taken up on-mass, more and more hedge funds are looking to an OEMS that promises a much more seamless workflow to the front office. Until a vendor ‘truly’ (oh, I know there will be some bleating coming from this) comes up with a best-of-breed platform covering the two pillars, we can expect to continue to see this trend to grow. The natural place for an OMS is within the EMS, which allows users to concentrate on a mature and tight link to the PMS in real-time. THIS is when you can truly have the best of both worlds.