In a push to maximize efficiency and provide the buy side with more service, sell-side brokers are asking their order management systems to do more than just process and route orders.
In what resembles more of an evolution than a revolution, OMS vendors and brokers who develop their own systems are incorporating features such as trade cost analysis and compliance monitoring into systems. The buy side is embracing these new developments, according to Richard Johnson, vice president of market structure and technology at Greenwich Associates.
A recent Greenwich report concluded that broker-dealers are demanding OMS platforms support multiple asset classes, provide pre-trade, real-time and post-trade analytics, and a wide range of sophisticated functions including risk analytics, compliance, reporting and TCA.
“What we’ve done is taken a look further into the OMS and noted the movement away from what was once a very basic system and its progression to a more sophisticated system,” Johnson told Markets Media. “And they’re doing it across multiple asset classes – this isn’t just about equities anymore.”
The new systems are more customized and doing things such as exporting data into other desktop applications, he added.
Which ones?
Risk managements and compliance. With the regulatory focus on market abuse, embedded tools that alert traders to longer-term patterns of market abuse could be a differentiating feature for sell-side OMS providers and reduce risks for large broker-dealers. This requires the sell-side monitor more closely and more often such things like capital usage, total notion value traded, orders per second, credit ratios and client trading threshold data.
“We expect sell-side compliance teams to push for more thorough and auditable processes,” Johnson said. “Robust and customizable reporting within the OMS would reduce points of failure, streamline the workflow and prove more scalable over time as the business evolves.”
All of this comes at a time when the brokers are themselves under pressure to do more with less. Constrained by flat commission growth, broker have been shifting the burden of this move towards greater compliance onto the OMS vendors and systems.
So will this move towards more a more powerful OMS replace staff and further downsize the brokerage business?
“On the contrary, when it comes to compliance staffs the sell-side is actually increasing staff,” Johnson told Markets Media. “With this renewed focus on compliance between the banks and brokers there is a need for more staff, especially as more and data are generated and need to be interpreted.”
So the sell side is inheriting another cost of doing business, eating into already thin profit margins. Johnson said that new cost of business is not just limited to the sell side either, as buy-side trading desks will eventually see the costs of greater compliance trickle to them too. But for now, it’s a problem for brokers.
“The broker-dealers are going to have to be more careful and selective of which OMS vendors they select to carry out these new mandates efficiently,” Johnson said. “The modern sell-side firm literally could not do business without an OMS…the crucial role it fills makes it all the more important that brokers select wisely for their business needs and budget.”