January 31, 2011 – The best order management system handles the most assets, in the most markets, without a hitch, in the fastest possible time.

All order management system vendors can provide basic buy and hold equity functionality.

But the key differentiators today revolve around “smart” order routing and, in general, low-latency trading. Integrating with other systems to enhance out-of-box functionality is also critical.


The functionality required in any OMS is driven by the needs of its users.

This functionality gets defined by portfolio management, trading, control, finance, regulatory, and operations groups. Users may request enhancements to handle expanding asset class coverage, streaming real-time market data, electronic trading or execution management, as well as performance management and attribution, facilitation of internal controls, post-trade analytics and transaction cost analysis.

Additionally, specialized investment strategies, like those employed by hedge funds and wealth management firms, typically require a specific set of functionality, including fund-of- funds trading or complex tax lot optimization.

Firms should ensure core criteria are satisfied prior to implementation. For example, the system should facilitate the trading of all or most security types, eliminate cumbersome manual processes, provide tight internal controls, meet regulatory requirements, and enhance risk reporting capabilities.

In addition to base functionality, the ease of application integration should also be a consideration — particularly when a firm uses multiple venues for trade execution and has installed an Execution Management System (EMS) as part of its trader desktop. The OMS typically facilitates such compute-intensive tasks as order generation, compliance, and middle-office processing, whereas the EMS is a lightweight tool that allows traders to execute sophisticated trading strategies quickly.

The current trend is to tightly integrate the OMS and the EMS. As such, many OMS vendors are attempting to add execution management to their functionality suite, just as EMS vendors are attempting to provide traditional order-management functionality.

Regulatory Requirements

The OMS will remain critical to enforcing front-office regulatory mandates. As such, it is important that an OMS can handle future regulatory changes. To assess any OMS’s ability, simply look at how it has handled recent changes, such as restrictions on short selling the stock of financial services firms.

The President’s Working Group on Financial Markets, created in 2007, identified disclosure, valuation, risk management, compliance, trading, and business operations among the key focus areas in a best-practices release for the hedge fund industry.

A similar Hedge Fund Working Group assembled in the U.K. provides standards for industry best practices that will be maintained by the Hedge Fund Standards Board.

The best-practice standards were identified in the following areas: disclosure, valuation, risk management, governance, and shareholder conduct. The guidance is a fair indication of self-regulation by industry members in anticipation of forthcoming regulations.

The latest round of regulatory changes will necessitate an OMS upgrade, although the scope of the upgrade is undefined. Make sure the OMS can handle not just a few additional compliance rules, but several new rules from all jurisdictions in which your trading takes place.


Each OMS must conform to the asset manager’s pre- established technology standards and overall technology strategy. This typically includes:

  • Hardware/operating system/database management system technology stack
  • Middleware platform
  • Application delivery preference (desktop installation versus fully-hosted Application Service Provider (ASP))
  • Disaster recovery requirements
  • Openness of platform architecture
  • Global deployment faculties
  • Maintenance tolerance

OMS vendors offer varying options and support for each of these areas. However, it is not uncommon for an asset management firm to compromise in order to fit a vendor OMS into its enterprise architecture.
The majority of large and medium-sized firms have dealt with these issues during their initial OMS installation. However, evolving technology preferences and the narrowing of the support provided by OMS vendors may necessitate revisiting this area.

The firm must evaluate its target-state system architecture and the modifications required in downstream systems to accommodate a new or revised OMS by focusing on changes to feeds and system interfaces.

Pay particular attention to the openness of the application’s architecture. This openness facilitates integration of the OMS to both internal and external systems.

All vendors claim an open architecture; however, there are varying degrees of openness. Supported integration options typically range from direct database loads or extracts to programmatic import/export facilities with validation logic, to extensible Application Programming Interfaces (APIs), to completely transparent Service-Oriented Architecture (SOA). The more open the systems, the tighter the integration; however, integration introduces more moving parts and more points of failure, all of which must be monitored and maintained.

Risk Management

Recording trade information accurately in the OMS is critical for accurate risk management.

Trade capture is the most significant part of the lifecycle — without it a firm has no knowledge of trade activity. The transactions captured are fed downstream to middle-office and back-office systems to facilitate trade confirmation, position management, and eventually profit and loss and risk exposure calculations. The OMS must provide the capability to manage risk reporting for each desk, as well as supervise the escalation process as risk reporting is included in the enterprise reporting processes.

Some systems can integrate with specialized software from risk analytics vendors. Make sure you know what you’re getting. Most vendors provide a defined set of functionality, which a trading firm must either accept or extend through customization or integration.

Similarly, an organization will have technology preferences or standards that must be aligned with the vendor offerings. Each firm defines its own criteria for tracking and managing risk, but they must also conform to the regulations imposed on the markets in which they trade.

Navigating this environment will require buy-side firms to instill discipline and empower its people to stay at the forefront of market developments. Doing so means that business and technology leaders may engage in dialogues with system providers to determine the appropriate time to conduct a value-added gap analysis of their existing systems.

Making the Decision

With so many factors to consider, the decisions to evaluate the viability of an existing OMS and determine next steps are not trivial.

A disciplined approach with participation across business groups is required to successfully assess trading, operations, compliance, and technology. A Project Management Office (PMO) may be necessary to coordinate the overall effort. By driving the group toward a defined, target end state, it will be easier to prepare a detailed work plan to address the transition. This type of focused approach can help the organization navigate through a myriad of issues efficiently.

This story originally appeared on Securities Technology Monitor.

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