Stepping into the trading future with Order Management Systems

May 1, 2024

Teleporting from outdated legacy systems on trading desks with modern order management systems (OMS) is a tall order, but a necessary one to undertake if firms want to stay competitive as cost and regulatory pressures build.

In the world of finance, OMS are typically used by larger institutional investors like hedge funds, asset managers, and brokers to efficiently execute securities orders. The applications maintain a clear picture of each transaction, ensuring proper handling, registration, and tracking.

They should form an integral part of the modern technology stack as they help to streamline workflows, save time and money through automating mundane processes, and bolster risk management through the reduction of human error.

The benefits of simplifying complexity are clear but there are issues market participants need to consider carefully when selecting an OMS and swapping out their embedded and, at times, monolithic systems to teleport into the future.

The benefits of Order Management Systems

From equities to derivatives, OMS facilitate the tracking of orders and help traders and brokers fill them quickly. Trade order management involves activities like order routing, execution, trade confirmation, allocation, and enhanced capabilities to management stakeholders to:

  • keep accurate records
  • ensure securities trades follow instructions
  • facilitate precise settlement
  • track clients and securities, and
  • provide thorough reporting for traders

From a trader’s perspective, trade order management is crucial as it helps to optimize trading strategies, minimize risks, and achieve investment objectives.

From a broker’s point of view, it helps to provide better services to clients, reduce operational costs, and improve overall profitability.

Common oversight and informed decisions

A recent report by Coalition Greenwich found that some firms in derivatives have 30 or more different systems in their middle- and back-office operations. Moving data through this multitude of platforms can be overly manual and introduce cost and risk, such as incorrect trade booking, over (or under) collateralization, and inaccurate risk data.

The adoption of an integrated process provides stakeholders a real-time overview and alignment of market risk, compliance, and advanced trading features.

OMS’s promote transparency by providing a thorough grasp of the market and its participants. By giving traders better market knowledge, they help them make informed decisions.

On the security front, it gives dealers an extra degree of security: the secure communication channels and data encryption it offers prevent hackers from accessing traders’ personal information.

Automating the end-to-end trading process improves trading efficiency and effectiveness reducing costly errors.

Furthermore, by helping traders follow regulatory requirements they help avoid costly fines and penalties.

As we recently wrote, the operating environment in financial markets is more challenging, as authorities seek to push more securities trades through a central clearing process to render the financial system more stable and resilient.

Shorter settlement periods will also have an impact, and the shift next month by the US and Canada to a T+1 scenario is a major test for capital markets globally. India, home to one of the world’s fast-growing markets, completed its transition to T+1 last year and is now aiming for same-day settlement (T+0), adding to the challenging operating environment for cross-border transactions.

Challenges in implementation

A panel of experts last year said that a delicate balance must be struck by firms between chaos and stagnation when seeking to improve legacy OMS. Many still rely on outdated systems, leaving them with sub-par workflows due to limited options for replacement. The sheer size and depth of integration of these systems make swapping them out challenging.

Management consultancy Liqueo warns of the different challenges that asset managers may face during OMS implementation.

The assessment phase involves tailoring solutions to meet diverse requirements, while the crucial design phase involves a comprehensive understanding of data collection and treatment.

During the test phase, data integrity is crucial, as missing or incorrect data can jeopardize the entire workflow and create issues within the organization or between internal and external systems.

The final stage of implementation is the Target Operating Model (TOM), which is seen as a synthesis between the old and new system. Liqueo advises starting with a new TOM from scratch and discussing with the client which parts of the old TOM should be carried over, and which can be replaced or even removed.

Staying competitive in a changing world

Given the regulatory and industry headwinds sweeping capital markets, from more central clearing to compressed settlement times and growing demand for retail derivatives, firms must act fast to maintain a competitive advantage.

Choosing an OMS is an important step in this direction.

Given the broad spectrum of available options, customers should assess their company’s strategy, create a roadmap of required features, compare the pros and cons of traditional versus API- and cloud-based solutions, and consider future growth and scalability to support their business strategies.

Last but not least, the selected OMS must include strong customer support and training options so that any issues can be addressed promptly. Selecting a technology provider is one of the biggest strategic investments a firm will make – teaming up with the wrong partner can be costly.

The volatility of capital markets and higher risks means firms need to automate as much of their workflow as possible, leaving space and time for their professionals to focus on areas where a human touch is still required. Many have already embarked on this technological journey. For those who haven’t, there is still time. The question is, though, how much before they are left behind?

ION Markets

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