Mention Regulation NMS and order management system (OMS) in the same breath, and technology suppliers will seize the opportunity to explain that firms on the buy and sell sides need new functionality to compete in a more-automated trading environment. But this time they may not be exaggerating.
Several technology vendors say the sell side is worried about whether it has the right technology to compete under the rigors of Reg NMS, which will require fast order routing, access to real-time order books and real-time transaction reporting back to the buy side. If the sell side needs to route orders to an ever-growing number of execution venues - including exchanges, ECNs, alternative trading systems and dark books - and then report the results back to buy-side customers' OMSs, then no wonder they're worried.
According to some technology vendors, those OMSs have been patched and upgraded over the years to cover new functionality such as basket trading or connectivity. Mark Ames, CEO of Fidessa, explains that because the OMS is intertwined with so many other applications, including back-office functions, which are critical to clearance and settlement, firms are afraid to remove what is a mission-critical system.
Ames says there are a number of midsize and large broker-dealers using legacy applications built 10 to 15 years ago. "They have known for a while that these legacy applications are not well-tuned to where the markets are going," says the CEO. And he is in a position to know since Fidessa has 45 brokerage customers in the U.S., most of which have gone through systems conversions.
Even if Wall Street firms are reluctant to switch their OMSs, they must have a system that helps them comply with the new stock trading rules. "Probably, the items that need to be in the OMS that are of greatest concern will be improvements to help with supervision, and an extension of that would be compliance tools," comments Michael Mollemans, head of electronic execution sales at Daiwa Securities America. "There's been a lot of talk that brokers may be required to have real-time supervisory tools in place as opposed to end-of-day blotters or exception reports that they're used to," he adds. Because brokers will need to take out the best price at each venue, there will be an emphasis on smart order routing, "and the speed at which you do that is becoming more important," Mollemans says, adding that brokers will also need to connect everywhere, whereas in the past they could go to a few destinations.
For this reason, many sell-side and buy-side firms are probably shopping for execution management systems (EMSs) - the likes of FlexTrade, Portware and Trading Screen - or direct-market-access (DMA) platforms that are more nimble at managing orders on multiple destinations, executing across multiple asset classes and providing real-time market data. "You may have to take a whole new installation in order to get that functionality," says Jeromee Johnson, a senior analyst and consultant at TABB Group, referring to sweeping and pegging functionality across multiple destinations.
However, the lines also are blurring among OMSs, EMSs and DMA systems, and it's unclear whether firms will need all three in the future. Johnson sees the OMSs moving upstream into the trading space, while the EMSs are moving downstream into compliance. But should you integrate these systems or buy a system that can do it all?
Fidessa's Ames contends that his firm has a broader set of functionality than the classic OMS with basket trading, single stock trading and algorithmic trading, as well as middle-office features such as allocations and notice of executions, all glued into the OMS and its buy-side EMS via its middleware. However, betting on a single vendor can be risky. So firms need to check out tech vendors before they start a conversion. Does it reinvest in its product, and can it spend money quickly to adjust to changes? With Reg NMS bearing down, there isn't much time. Even so, look before you leap - or, in the case of Reg NMS, before you sweep.
Ivy Schmerken is a 20-year WS&T veteran. As Editor-at-Large, she covers trading for both Wall Street & Technology and Advanced Trading. email@example.com