Sell-Side Firms Need to Improve OMS Technology, Finds TABB

As investment managers reduce their number of brokerage counterparties and look to control trading costs, sell-side firms are looking to improve their order management systems (OMSs) and execution management systems (EMSs) in order to prove their worth to the buy side, according to a new research report from TABB Group, commissioned by SunGard.

The report, The Transformative OMS: From Tickets & Timestamps to Today’s Technologies, comes from surveys of 100 individuals and an additional 11 personal interviews, comprised of 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).

In order to keep up with the buy side’s needs, the top technology initiatives for brokers over the next 12 to 24 months are for improving OMSs and EMSs, while the second most popular initiative is adding to or improving analytical tools such as Transaction Cost Analysis (TCA). 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 in order to streamline firms’ technology. However, many sell-side firms report using at least one EMS in addition to their OMS in order to offset some limitations in OMS capabilities. The authors note that many are concerned about the costs and thereby sacrificing functionality, and “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.

In order 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.”