How FX trading firms can exploit the power of next generation order management systems system

This content was originally published by e-forex.net

A new report from Crisil Coalition Greenwich (OMS benchmarking: providers, market sizing and what’s next) highlight the challenge of keeping up with the rapid transformation of front-office trading technology systems.

OMS providers are adding capabilities like portfolio modelling tools, compliance and third party connections. They are also enhancing workflow capabilities such as real- time compliance checks and other supportive capabilities, as well as product or function-specific features like hedging, trading tools and portfolio management functionality. The pace of change is unlikely to slow with systems vendors investing 20% or more of product revenue in R&D associated with their platforms. Vendors are working to add open APIs, automation and cloud-native offerings to enable version-less updates and faster data crunching and output. Mobile capabilities and web-based apps are also on the horizon, while some vendors are adding data management capabilities and new analytics like pre-trade TCA and liquidity tools.

An order management system will streamline the entire order and trade life cycle for an investment firm or broker-dealer, making it faster, more accurate and more controlled. This obviously strengthens the compliance and auditing required in regulated markets and while FX is an unregulated market, market participants are regulated and are subject to compliance requirements.

Functionality across asset clases

There are some common features or requirements of an order management system across any asset class explains Mike Baradas, OMS product manager at Sterling Trading Tech. “In terms of technology, the FIX messaging system is standard across most asset classes, including FX,” he says. “But FIX only covers order routing and order execution reports. An OMS that has full API architecture can integrate with the different systems that could be involved in the investment or trading lifecycle of a particular firm.”

OMS has evolved from a functional necessity to a strategic weapon – eliminating human error, maximising automation and transforming how institutional investors command fragmented markets.

That is the view of Medan Gabbay, chief executive officer at Quod Financial, who goes on to outline some of the key features and functionality.

“Today’s best OMS platforms are not just trade routers,” he says. “They are AI-fuelled, low latency ecosystems enabling predictive analytics, intelligent automation, risk control and seamless multi-asset trading out of the box.”

Gabbay observes that an FX-ready OMS must do more than handle tickets. It needs to understand fragmented liquidity, handle multi-listed instruments and dynamically route orders with algorithmic intelligence across opaque venues. He warns that many systems have shortcomings that have persuaded firms to develop their own solutions. “Most OMS platforms don’t just need additional modules to support the needs of market participants,” says Gabbay. “They fundamentally lack the functionality required to thrive in a world driven by data intelligence, which is why many larger firms choose to build their own systems.”

“Vendor products often fail to address the complexities of managing multi-asset strategies and data-driven decision making,” he continues. “Attempting to retrofit such capabilities into existing products is either prohibitively expensive or so misaligned with the core design that it is nearly impossible to achieve.”

From a bank perspective, some of the main drivers around needing an OMS relate to an obligation to enforce need-to-know policies. The order book exposes a lot of information to trading desks and sales desks as to potential price action at various different price levels and banks need to ensure that only the people who should see an order can see it to ensure information is not leaked into the market as to where there’s interest.

Electronification is driving demand

There is also increased desire to electronify workflows explains Cormac Walsh, head of FX trading products at ION Markets.

“Banks want to capture orders electronically, so we are highly integrated with their digital strategy to capture orders from single dealer platforms, sales platforms, multi- dealer platforms, APIs and all sorts of internal divisions within the bank and to route those orders to the appropriate algorithms to automatically execute – and only on an exceptional basis to post them for a trader to manage,” he says.

On the question of how OMS solutions are tailored and engineered to deal with the specific requirements of FX, Walsh says that although order management systems traditionally focused on automated management resting, fixing and algorithmic orders for FX cash, modern systems also extend into cross-asset FICC workflows – handing orders on vol, fixing income and commodities.

The relationship between OMS, PMS and EMS front office solutions has evolved according to Audrey Costabile, senior analyst for Coalition Greenwich market structure and technology.

“As technology and data become more integrated, the lines between PMS, OMS and EMS solutions have blurred,” she says. “Although optimisers are offered a la carte by some vendors, OMS solutions providers are including them in their offerings. Most equity traders prefer a standalone EMS, but this is also changing due to the desire for a multi-asset class EMS, more trader/ portfolio manager overlap and firm size – smaller firms may prefer more front-to-back boxes.”

ION Markets FX does a lot of work automatically capturing flow generated from PMS systems but also from other not-so-obvious divisions of a bank such as custody, transaction banking or portfolio hedging.

“All these activities generate orders and there is a lot of focus on being able to automatically capture those orders so that if a client is doing, for example, a portfolio rebalancing on their equities portfolio at the end of the month and there is FX exposure generated on that, they are able to automatically post that FX exposure as orders into the OMS,” says Walsh.

OMS straddles multiple systems

According to Baradas, the OMS can be seen as an umbrella platform that bridges the PMS and EMS, whether it is controlling routing of orders to different exchange venues/liquidity destinations or handling the risk controls to make sure orders are not oversized or routed to the wrong venues.

“This includes margin calculations,” he says. “When you get into derivatives trading there are very specific regulatory or clearing requirements in terms of margin calculations that the order management system will handle.”

Gabbay believes the future belongs to those providers who can consolidate OMS, PMS and EMS into a single adaptive fabric, breaking silos to create real time intelligence from pre- trade to post-trade.

On the main challenges faced when consolidating these systems, he observes that OMS serves as the central hub, balancing a wide array of functions with often conflicting demands. While PMS prioritises workflows over performance, EMS focuses on performance and data intelligence. “Positioned between the two, OMS frequently lacks the technical and functional capabilities necessary to effectively bridge these processes,” says Gabbay. “The idea of consolidating PMS, OMS and EMS into a single solution feels unrealistic. Instead, the most immediate benefits will likely come from leveraging PMS for core operations while adopting a data-driven OMS/EMS for advanced needs.”

Currently, the industry – across all asset classes – is heavily focused on cost-cutting, with an ongoing race to reduce vendor spending. This environment is pushing clients toward all-in-one solutions largely out of fatigue and a lack of willingness to invest in alternatives.

“While some vendors offer more modern solutions unburdened by legacy systems, they remain rare,” suggests Gabbay. “Significant changes in industry mindset and investment would be required for such alternatives to gain widespread adoption.”

As technology becomes an increasingly critical differentiator, funds are showing less interest in investing in it, he adds. “This trend will likely lead to further consolidation as firms lacking the necessary technical expertise find themselves unable to compete. The buy-side is, in effect, setting itself up for failure in the medium term. Sticking to outdated thinking in an era that demands innovation will inevitably drive systemic change.”

Cloud offers universal option

Gabbay’s response to the question of what deployment choices are available for firms of different sizes who are looking for OMS to automate their order flows from low-touch to no-touch is that whether the client is a boutique desk or a global titan, cloud native microservices allow low- touch to no-touch trading without being shackled to legacy anchors.

When asked about the deployment choices available, Baradas observes that the traditional software solution for an order management system for a larger firm is typically an on-premise solution.

Then there is the cloud option, which is typically more scalable and faster in terms of innovating and developing the system.

“In between you have a solution where the database remains in your own data centre but you want the user interface available on the web or on a mobile platform,” says Baradas. “This is what you would call a hybrid solution between on-premise and cloud. Typically it is an API architecture that makes that happen, connecting with the best-in-class solution you are looking to provide to your customer.”

The Crisil Coalition Greenwich report notes that as professionals at buy-side firms gravitate toward multi-asset class solutions, the management of workflows – including books of record, compliance checks audit trails and other downstream capabilities – changing the look and feel of vendor OMS solutions.

Market participants are obviously interested in how the ongoing development of OMS is driving innovation and efficiency in multi-asset sell-side trading. Baradas refers to this as a technology issue in terms of being able to handle high messaging rates.

“There is not a huge difference between what you would call an institutional firm (where they may only have large customers with 500 or 1,000 accounts but are actively trading or have active transactions that run into the hundreds, thousands, or millions of transactions per day) and a retail broker where you can have smaller account sizes but they are going to have thousands, tens of thousands or even hundreds of thousands of accounts,” he says.

From a technical perspective, the messaging requirement is the same so the need is for a technical architecture that is high throughput and low latency.

AI boosting system sophistication

Multi-asset sell-side trading is no longer a privilege of the giants, says Gabbay. “AI-driven OMS platforms now weaponise smaller players with execution precision, predictive analytics and scalable automation,” he adds.

Gabbay recommends FX market participants choose an OMS partner rather than just a vendor – one that brings native FX knowledge, AI-powered decision support, cross-venue routing agility and a roadmap beyond today’s liquidity fragmentation.

When it comes to implementation, Baradas says the sell-side has a decision to make on buy versus build. “Typically, what we see smarter firms do is buy solutions that handle functions that are standard across every asset class such as regulatory requirements, risk controls or margin calculations,” he says. “They are then spending their investment dollars on building a unique customer experience.”

Costabile recommends working with a vendor that covers a range of products.

“For instance, can all FX and derivatives be analysed using one vendor?” she says. “Can FX

hedges be automatically generated for equities trading? If an OEMS is desired, how does execution work? Is there interoperability with different venues? Are the tools for best execution and protocols/ algos coming from the venue or the OEMS? Is the solution open and modular, allowing for tweaks necessary for a particular strategy? Finally, how is support assigned and is it available at all times?”

Operational stability is one of the first things to consider when looking for a potential OMS provider suggests Walsh.

“An OMS outage isn’t simply system downtime – it is equivalent to flying blind with live risk,” he says. “This creates significant market, operational and reputational risk. The OMS must scale to support the most volatile market conditions and provide enterprise-grade resilience with instantaneous failover across all tiers.”

Another consideration is performance at the tail end of the performance curve. In the most volatile conditions, can the OMS keep up with the market if prices are moving 20-50 times a second across thousands of orders in hundredsof pairs where each rate update is potentially creating an order trigger event?

“The OMS needs to be designed to be very operationally stable but also capable of performing in the most extreme conditions,” adds Walsh.