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In this article, we’ll explore what an order management system in finance is. The term has a common acronym, “OMS”, and exists in many industries. In this article, we focus on what a financial order management system is. We explore common and frontier capabilities and address misconceptions about what a buy-side OMS is and isn’t.
What is an order management system (OMS)?
The OMS Software serves as the spider in the web of a company’s workflows, as it’s the system that connects all processes intraday:
- Pre-trade: trades enter the OMS and are checked for compliance, routed and routed to for trading
- Post-trade: facilitate straight-through processing through confirmations & allocations. Some OMSs also check post-trade compliance and are the source for reconciliations.
- Portfolio monitoring: real-time portfolio analytics, P&L and exposure.
In recent years, system landscapes have broadened. We created Limina to cover all workflows from order raising (rebalancing to model, benchmark and fast order entry) to shadow accounting (NAV and reconciliation) in one system – with smooth workflows and exception-based automation.
Features of a buy-side order management system
The best order management systems cover, at a minimum, the following capabilities:
Other systems adjacent to order management software
Other systems adjacent to an investment manager’s workflow include portfolio management software (PMS) and execution management software. In the below illustration, we highlight the most common types of systems and where they typically fit in a target operating model of an investment manager. Each of the 5 columns represents an operating model; the blue is where Limina normally serves in each model.
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Portfolio Modelling and Rebalancing
Order management system features sometimes include portfolio modelling capabilities that help portfolio managers assess the impact of potential trades on their portfolios. They can simulate different scenarios, analyse the effect on exposures (absolute and relative to benchmarks), and rebalance portfolios to align with investment objectives.
This functionality was historically part of a separate system, a PMS. You might have noticed it’s similar to the order generation functionality mentioned above. In reality, the line between an OMS and PMS has blurred, and many of these systems have turned into a combined Portfolio Management Software to create a Portfolio and Order Management System (POMS) regardless of where they started.
Execution systems
Features of order management systems can also include execution (an Execution Management System, or EMS for short). The simplest way to tell which functionality resides in which system is to consider who uses which:
- OMS: portfolio managers
- EMS: traders
The portfolio manager and trader can be the same physical person for small investment teams, wearing two hats.
An EMS is designed primarily for what happens once orders are ready to be executed in the market. It offers access to real-time market data (often including order depth information) and connectivity trading venues.
As with PMS and OMS, there has been a trend towards merging OMS and EMS into one solution, an OEMS. The OEMS has value for simple trading requirements, such as liquid equities or derivatives. For other asset classes, such as fund of funds or fixed income, the EMS either isn’t needed (fund of funds) or is a very specialised system (fixed income) and a combination of OMS and EMS makes less sense.
The benefits of integrated order management systems
Integrated Order Management Systems means an OMS part of a broader system. As we can see from the system landscape illustration above, an OMS can be part of a front-to-mid or front-to-back office system. The top benefits of order management system being part of a wider system include:
- Data integration challenges reduced.
Since all functionality is in one system, the challenges of integration between systems are removed. The integration challenge isn’t wholly eliminated because you must still connect to brokers, admin, custodian, etc. - Enable smoother & faster workflows.
When multiple functions are merged into one system, workflows can natively include functionality from different areas. An example is pre-trade compliance; if it’s natively built into order-raising workflows, it can be checked automatically in the background and not even visible to portfolio managers in case of no breaches. - Lower total cost of ownership.
With fewer systems, faster workflows, and fewer vendor licenses, the total costs of operating systems come way down. We’ve been able to help managers reduce costs by up to 60%.
Limina’s investment management system can cover all your system needs. It goes beyond system functionality to include automation capabilities as well. See it for yourself and book a no-strings-attached demo today.
Multi-Asset Class Support
Modern OMSs should support all asset classes, surpassing their historical focus as equity order management systems. The best OMS allows investment managers to trade across different asset types, such as equities, fixed income, derivatives, alternatives, and more.
The reason why is that few managers hold only one asset class. Even the simplest equity portfolios often contain at least FX and sometimes cash equivalents. Most managers will have multi-asset portfolios. Even if you don’t manage multi-asset portfolios today – you might in the future.
An OMS must cover entire portfolios; it’s not a good idea to have two OMSs cover different parts of a portfolio (e.g. one for fixed-income and one for equity) because cash and compliance is overarching to the entire portfolio. You’re creating a synchronisation nightmare by using multiple OMSs.
For these reasons, we firmly believe that all OMS vendors of the future will provide cross-asset capabilities in one system. The top order management systems already do, and those that can’t keep up eventually die out. Next, let’s look at the capabilities that an OMS needs, specific to some select asset classes.
Equity Order Management System
Using FIX, an order management system can connect electronically for equity execution to brokers, EMSs or outsourced trading desks.
Cash calculations for equities include adding transaction fees such as commissions and taxes. The OMS enables straight-through processing via matching or automated trade affirmation and trade reconciliation.
Equity swap OMS (TRS)
An OMS for stock swaps needs additional capabilities on top of cash equity. There are two main additions:
- Ability to calculate the financing leg and return leg resets (this extends to all total return swaps, not just equity swaps)
- Ability to instruct if a trade is buy (long) vs buy-to-cover and sell (reduce long) vs sell-short
Equity swaps support is a crucial capability for hedge fund order management systems.
Fixed income order management system
A fixed-income OMS differs from equities mainly because liquidity might affect which bond gets bought. Either, the OMS become more of an optimiser that looks at the characteristics of bonds to be bought. Alternatively, the OMS must be closer to the markets, being an OEMS supporting RFQ workflows.
Fund of funds OMS
Order management software for fund of funds includes complex rebalancing, with feature such as look-through and timing settlement and exposure in time (due to settlement cycles being different on sell/buy and between different funds). Electronic trading is not standardised, even over FIX, so each connection is bespoke.
Limina support many fund of funds investment managers; please feel free to reach out to learn more how.
Key takeaways of this article on Buy Side OMS
There are multiple different types of order management systems. In our opinion, the top OMS providers offer the following benefits:
- Functionally broader than “just” OMS (ideally front-to-mid or front-to-back)
- Cross-asset capabilities (even if you invest in just 1 asset class today, you’re future-proofing your business with a multi-asset OMS)
- Automation capabilities, such as data quality controls, automated import/exports, the ability to reduce spreadsheet maintenance, etc
