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September 30, 1999

Order out of Chaos On Buy-Side Desks: Proliferating Order Management Systems

By Peter Chapman

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  • Order out of Chaos On Buy-Side Desks: Proliferating Order Management Systems

In a sign of the times, order management systems that process and deliver institutional trades are proliferating on the buyside.

While some of Wall Street's largest desks started using homegrown order management systems (OMS) ten years ago, medium-sized desks representing the bulk of trading desks on the buyside, are joining the OMS bandwagon.

As the OMS technology matures, medium-sized desks at firms that manage between $1 billion to $30 billion, are turning in droves to vendors for affordable solutions. The reason is obvious: exploding trade volume requires processing efficiencies.

"Mid-sized firms represent the largest market for [OMS] systems," said Dushyant Shahrawat, an analyst at TowerGroup, a securities industry consulting and research firm based in Needham, Mass. Shahrawat, who recently authored a report on OMSs for Tower, said it costs between $5 million to $7 million to build a system. "That's beyond the reach of all but the biggest firms," he added.

With one-day trade settlement looming, the buyside is joining forces with the sellside to implement straight-through-processing (STP) - the seamless electronic execution, settlement and clearing of order flow with minimum manual entry of data. OMSs are a vital component of that goal.

"Going from T+3 to T+1 will require a reengineering of all systems," said David Quinlan, a principal at OMS vendor Eze Castle. "Existing methodologies will have to change. The industry needs to get to a real-time mentality."

The Cost

An OMS enables a portfolio manager to send orders to the traders working for his firm. The traders, in turn, can then send the orders to broker dealers, alternative trading systems and other market centers.

The trader can use the technology for pre-trade compliance, to calculate average purchase prices, to monitor account cash balances, to interface with clearing and settlement systems, to track executions by individual brokers, and to perform other administrative duties.

Overall, an OMS eliminates much of the trader's clerical work. "As a trader I want to spend my time digesting market information, not doing paperwork," said Michael Thompson, head trader at Chicago's William Blair Investment Management which uses Advent Software's Moxy. "The OMS creates tons of operational efficiencies," he said.

"An OMS increases operational performance by reducing errors and pulling all the relevant data together in one place," said Tom Driscoll, vice president of business development at OMS vendor Charles River.

William Blair, which manages $10 billion in assets with four traders, has been using Moxy for about eight months. "Our original goal was to eliminate paper," Thompson said.

Thompson said the OMS gives him a new edge when he is trading. "Previously, orders [from the portfolio managers] would trickle in," he said. "They would come in lots of 1,000 or 2,000 shares and we would usually execute at the bid or offer. With Moxy, orders can be consolidated into blocks, giving us greater negotiability."

Thompson says orders of 30,000 or 50,000 shares often let him execute inside the national best bid and offer, thereby improving the price.