Sell-side firms are looking to upgrade their order management systems (OMSs) and execution management systems (EMSs) to prove their worth to investment managers who are reducing their number of brokerage counterparties and minimising trading costs, according to a new report from TABB Group, commissioned by SunGard.
The report, ‘The Transformative OMS: From Tickets and Timestamps to Today’s Technologies’, draws on a survey of 100 individuals and 11 one-on-one interviews from
a range of brokerage firms and investment banks across North America, Europe
and Asia.
“Simply being an adopter of OMS technology is not an adequate value proposition
to maintain, much less gain, buy-side business. After years of low capital
investment in trading technology, the buy-side has staked its claim and
threatens to disintermediate sell-side firms that do not keep pace by
leveraging the latest technologies,” write the report’s authors, Alex Tabb
(partner at TABB) and Marlon Weems (founder of consultancy Hillcrest
Strategies).
To keep up with buy-side needs, the top technology priority for brokers over
the next 12 to 24 months is improving OMSs and EMSs, while the second most
popular initiative is adding to or improving analytical tools such as
transaction cost analysis. The third most common technology initiative is
around improving infrastructure.
“Across all firms, nearly half plan some type of OMS technology projects or
related efforts to upgrade analytical tools and infrastructure. This highlights
the overall level of dissatisfaction with current OMS and technology providers.
This also reinforces our view that, going forward, firms must aggressively seek
out technology partners able to provide more robust solutions in these areas,”
say the report’s authors.
The report also finds that the desire to consolidate OMS functionality across
all asset classes is top-of-mind for sell-side firms. Particularly for smaller
firms, current OMS functionality is focused only on equity execution, and fixed
income business models tend to still be manual, while many firms are
dissatisfied with functionality for other asset classes such as futures.
“This lack of OMS functionality across multiple asset classes is but one
negative by-product associated with the delay in acquiring updated
technologies,” write Tabb and Weems. “When firms neglect technological
improvements for such extended periods, the resulting limits in functionality
are no surprise.”
The report suggests that most sell-side firms would benefit from a more
flexible OMS infrastructure with a single point of execution. However, many
sell-side firms report using at least one EMS in addition to their OMS to
offset its limitations. The authors note that many are concerned about the
costs and thereby sacrificing functionality, noting “The attitude of management
in many cases appears to be ‘if they come, we will build it’ rather than ‘if we
build it, they will come.’”
Yet the report says that many boutique traders voiced frustration over the
unwillingness to upgrade an OMS or expand the capabilities of the current one.
For brokers to grow their business, the authors argue that sell-side firms need
to have the technology to help buy-side firms handle market structure
complexities and regulatory changes, along with providing better services
spanning multiple asset classes and trading strategies.
“To accomplish this, the sell-side must establish technology partnerships that
enhance their ability to measure trader performance and client profitability
while, at the same time, holding down expenses. All OMS infrastructures must be
reevaluated and the sell side must look for new, streamlined solutions that
provide all the tools necessary to meet today’s new set of challenges. Meeting
these challenges should not be viewed as an option, but instead must be seen as
a business imperative.”