A soon-to-be-released report by Greenwich Associates notes that as commissions fall, cost pressure on sell-side front-office IT is rising. It is also true that front office headcount has fallen considerably, lowering overall costs by some margin.
Fifteen years ago a cash equity trading floor may have had 20 traders and paid an order management system provider $20,000 dollars a month. Now it will have 1/3 of the users and pay roughly the same. Execution sizes have diminished and the need to process more trades in order to maintain a reasonable margin has become the challenge. The system has needed to become more efficient and to some degree, the value of the trader’s discretion gets trumped by the speed needed to comply with best execution scrutiny. The tools now provided to the end user allow less users to do more work.
Increasingly they are required to trade in multiple markets. The demand for a feature-rich single asset order management system (OMS) is not as high as it once was; the “arms race“ for new “cool” functionality has been replaced by the need to accommodate multiple asset classes. On the sell-side, less than 20 percent of equities desks also trade FX, swaps or futures. Where a broker can capture and process more of a client’s order flow across asset classes, they have a great advantage. Volumes are falling in most markets and capturing a greater proportion of the existing pie is more plausible than making each pie bigger. Tied to that and becoming increasingly important, is the ability to capture risk in one central location. This gives the broker a more defined picture of outstanding exposure while potentially increasing the end customer’s buying power by examining and netting exposure across all asset classes. Naturally, the more real-time the better, and the more assets captured increases both sides chances at success.
A considerable burden which OMS providers can lighten is the demand for ever-more information on the trading and investment process. Under MiFID II, the number of fields subject to a transaction report has risen from 23 to 81, and the range of asset classes captured has also exploded. The buy-side is having to answer questions from end investors as to what they are doing with their order. Everything that the sell side does is captured somewhere in an electronic system whether it is a manual order, a FIX order, a correction, or a give up trade. Ensuring that data can be captured and shared with other systems is invaluable.
As noted, where once the OMS business was a functionality arms race, it has changed. More value is found in managing the whole process essentially, making the OMS the hub by which the lifecycle of an order is managed. Whether receiving the inbound order or routing to an external venue, exchange or algorithm the OMS is at the center. OMS providers need to consistently help manage client risk, firm exposure, best execution and regulatory hurdles.
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