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.
Despite their affordability for medium-sized desks, OMSs are still not cheap. License fees run between $350,000 and $450,000 while annual maintenance charges are 25 percent of the total cost, according to Shahrawat. But he sees dramatic growth in sales: $260 million this year, climbing to $579 million in 2002.
There are nine OMS products offered by eight major vendors, according to TowerGroup. Most OMSs have been introduced in the last five years. Four of the vendors – Charles River, MacGregor, Eze Castle Consulting and LongView-sell standalone systems; the others – Advent Software, Decalog, SS&C and Thomson Financial Software Solutions-sell integrated systems, those that combine an order management module with portfolio management and portfolio accounting modules. Standalone OMSs cost more than the integrated variety, but offer greater functionality, Shahrawat says.
Lowering Headcount
The growth in the usage of OMSs is probably one major reason why the headcount on buy-side desks has not grown at the same clip as assets under management, some experts say.
"We can now easily handle a greater number of orders with greater efficiency and less chance of error," said Holly Stark, one of two traders at New York's Dalton Greiner Hartman and Maher. "The OMS we use definitely keeps our body count down."
Dalton Greiner, which manages $1 billion in assets, recently replaced an OMS from Merrin with a system from Eze Castle. Stark cited a lower price tag as one of the reasons for the switch, and noted that the DOS-based Merrin system was using old technology. Merrin was not Y2K compliant unlike her replacement, she added.
In the last five years, total assets under management in North America doubled to $18.6 trillion, according to Port Chester, NY-based Nelson Investment Management Network. Portfolio turnover-at least that of equity mutual funds-reached an all-time high of 87 percent in 1998, up from 75 percent five years earlier, says mutual fund tracker Morningstar.
"We would have five or six traders without it," said Carrie Canter, desk head at Dallas' Barrow Hanley Mewhinney & Strauss. The firm, which manages $40 billion, has three traders, and was an early adopter of Moxy in 1997.
Connectivity
Driving the sales of OMSs in the past 18 months is demand by traders for more connectivity – enabling their systems to communicate with other parties via FIX.
"At first, an [OMS's function] was about streamlining the investment process, about getting away from paper," said Jack Weiner, vice-president of global sales and marketing at LongView. "Now a trader wants to plug into several brokers and alternative trading systems."
FIX, or Financial Information Exchange, is a language embedded on computers on the buyside and the sellside to enable them to communicate more efficiently. FIX is gradually replacing the CMS, or common message switch, protocol, the standard for electronic communication on Wall Street, because of its open design. A FIX hook-up is universal, whereas the language of a CMS link can vary from broker to broker.
Shahrawat cautions, however, that not all OMSs are equal when it comes to connectivity.
"The robustness of the connection is something to consider," he said. "Not all systems can handle orders of 100,000 shares." He says the four standalone vendors are furthest along with connectivity.
LongView's Landmark, for example, links to 40 brokers; order routing networks like the Autex TradeRoute, Bridge's IOE/2, and Trinitech's NYFIX; and alternative trading systems like POSIT, REDIBook, OptiMark and Instinet.
Human Relationships
Despite the demand for more connectivity, most traders are reluctant to adopt a fully electronic trading operation. They still value their relationships with brokers.
"Improved connectivity doesn't do away with telephone calls," Longview's Weiner said. "The trader still wants color commentary. He still wants to know what's going on. But it does cut down on non-value-added calls. Fill reports arrive electronically."
Those other incoming messages, indications of interest, can also be managed more effectively with an OMS, according to Driscoll of Charles River.
"IOIs integrate with the trade blotter," he said. "If an IOI from a broker matches a prospective trade in the order blotter, it will pop up and the trader can decide if he wants to execute or not."
ATSs
A trader may also be routing to the many alternative trading systems that have proliferated in recent years.
"The fragmentation of market liquidity has made the trader's job more difficult," said Quinlan of Eze Castle.
Quinlan noted that a 500,000 share order, for example, could be broken up among a broker, a cross on POSIT and OptiMark. "The OMS makes it easier to keep track of all these orders," he said.
"The difference between portfolio returns is measured in basis points," said Shahrawat of TowerGroup. "It's an intensely competitive market, so getting the best execution is much more important now."
Having an OMS helps the process.
Vendor Product Launch Headquarters
Advent Software Moxy 1995 San Francisco
Charles River Charles River 1994 Woburn, MA
Development Trading System
Decalog IDEE 1995 Boston
Eze Castle Trader's Console 1996 Boston
Consulting
MacGregor Group Predator 1994 Boston
Merrin Financial Trading Platform 1987
SS&C Technologies Antares 2000 1997 Windsor, CT
Thomson Financial OpenTrader 1994 Boston
Software Solutions
Source: TowerGroup
