As buyside firms look to consolidate asset classes on a single trading platform, they have been turning to multi-asset class order management systems to support foreign-exchange trades along with other types of securities.Firms began placing more emphasis on doing their own FX trading in recent yearsand OMS vendors began converging their systems with execution management systems to save on infrastructure costs. It helps with risk, too. A consolidated OMS allows a firm to look across the entire organization to see its FX exposure, whether its connected to equity or fixed-income trades.
As FX traders become more discerning and sophisticated, theyre looking for greater FX capabilities. Along with a desire for aggregated functionality, they also want trading capabilities in their OMS. Most recently, Charles River introduced electronic quotes and execution for FX in partnership with its 360 Treasury Systems (360T) solution.
[OMS and EMS: Seamless is better, of course.]
For larger money managers, the major OMS providers are Bloomberg AIM, BlackRocks Aladdin and Charles River; some include Linedata, a Paris-based provider, on the list.
The OMS Role in Compliance
OMSs are an important piece of trading software, responsible for generating FX orders and running compliance. For instance, a buyside firm may generate a number of global equity orders for Canadian, Asian and Australian securities. Those trades generate FX exposure, which firms need to hedge out. An OMS will automatically tell the trader to purchase a certain amount of Canadian, Hong Kong and Australian dollars as a result of those trades.
An FX OMS also provides pre-order compliance. A fund may trade on behalf of many different accounts, all with different rules and restrictions. For instance, Account A might not be allowed to trade with certain brokers, so the OMS will tell the trader they cant trade with those firms. Or the OMS may say Account B can only trade with a certain broker.
The majority of clients for an OMS provider like Linedata is running equity or fixed-income funds and using FX to ensure the firm has the right currency to settle transactions, said Matt Gibbs, product manager for Linedata. Traders also use FX for hedging: They look at their currency exposure across the portfolio and use forward FXs or NDFs (non-deliverable forwards, a standard type of security within FX) to hedge against currency fluctuations.
Until recently, firms would hedge on a quarterly or monthly basis, according to Gibbs. That would be the time they roll and adjust their forward transactions to zero out their currency risk. What weve seen now, especially with the Asian currencies, which are even more volatile, and everyone assumes they are very overpriced-people are going through that currency hedging process on a daily basis because theyre so worried about that exposure to the currency, Gibbs said.
To better support FX traders, Linedata has added currency derivatives and implemented a new way of calculating market value and currency exposure and is in the process of automating the ability to manage hedging for 1,000 funds, all with different currency risk tolerances, with the press of a button, Gibbs said.
Adding Execution
In addition to enhancing coverage and functionality, OMSs are adding and improving execution capabilities. Charles River, for instance, recently improved trading functionality available through its OEMS, or order and execution management system.
Before the recent deal with 360T, if an order was generated in the OMS, the trader could open up FXalls application, for instance, to request quotes from banks and select the quote they wanted. They would then send a message back to Charles River from FXall, the FX trading venue with which Charles River trades, with the execution details of the trade. But now, the new functionality keeps the trade in one place-the OEMS. The partnership will enable clients to execute trades through the Charles River OEMS with more than 100 FX dealers and regional banks.
Instead of using the 360T front end to execute, we provide the ability to request competitive quotes directly in the Charles River blotter, said Des Gallacher, vice president, product management, for Charles River. We are in the unique position to have the full order history; we are the book of record for all orders. We are where these orders are generated, managed, executed and stored.
Charles River also plans to roll out a Request for Quote capability in the first part of 2014 that will allow traders to send an RFQ to five or 10 banks simultaneously.
Yet some see OMS providers FX EMS capabilities as relatively basic. Most OMS providers support an RFQ process but not the ability to look at streaming prices and act on that, said Sang Lee, managing partner of market research firm Aite Group. Most active FX trading takes place on EMS systems from Portware, TradingScreen and Flextrade, he said. Those vendors typically connect with FX ECNs such as Currenex, Hotspot, EBS and Reuters, Lee said.
EMS providers typically offer Level 2-like market data functionality for FX traders, Lee said. When you look at a trading screen, you look at different currency pairs, and the prices are constantly updated. That market view, the aggregation of prices from different venues, are not provided by OMSs at this point.
Vendors like Portware integrate with systems from OMS providers, and orders from the OMS are shipped to the EMS via FIX connection, API and even Microsoft Excel-based files, said Scott DePetris, president and COO of Portware. We work very closely and ensure that for the institutions that use us that we have a seamless integration into the OMS to have them virtually operate as a single system, he said.
But OMS providers say some information may be lost when an order moves from OMS to EMS, which is why the kind of all-in-one solution they offer makes more sense.
For instance, because many large asset managers generate large FX trade volumes as a result of their equity and fixed-income strategies, its useful to keep the trading and execution of those trades as close to the originating trade as possible. So theyre able to accurately measure the total performance of the managers original intention and manage inherent contingencies between the orders, said Charles Rivers Gallacher.
Lee agrees there are potential issues with data consistency when moving data from an OMS to an EMS and back. If you generate an order from your OMS and upload it into your EMS, once you start trading in your EMS and want to make changes to the order you sent out, you can do it from your EMS, but its not necessarily the case that thats reflected back into the OMS, Lee said. Thats why the integration piece is very important, obviously.
Whats likely to happen in the future is that OMS and EMS providers will team up via merger, alliance or joint venture, versus trying to develop the technology themselves, said Paul Rowaday, senior analyst with Tabb Group.
The FX OMS Future
Whats next in terms of buyside FX OEMS capabilities? Firms will continue to work on enhancing execution management functionality, Lee said.
Firms will also have to begin to figure out who the viable swap execution facilities are and start connecting with them, Lee said. FX is not the first wave of SEFs, but non-deliverable forwards will ultimately be mandated under the Dodd-Frank Act to trade on SEFs, so increasing connectivity with NDF SEFs will be critical. Both Bloomberg and Reuters offer FX SEFs.
Meanwhile, based on the new FX OMS offering from SmartTrade Technologies, based in Aix en Provence, France, sellside firms are looking for a different type of OMS functionality from buyside firms. SmartTrade, which serves second-tier European banks, offers a hosted FX service that provides connectivity to more than 40 venues, including banks, non-banks and ECNs. The package also includes smart order routing, aggregation, pricing distribution, risk management and an OMS.
The latest version of the SmartTrade OMS, backed by a cross-asset-class engine, enables banks and brokers to use resting customer orders as a source of liquidity. If you need to make a trade in the market, you can see if you can make this trade by using my order book first, said SmartTrade pre-sales manager John Stead.
The OMS also enables APIs for analytics and algo trading applications to access that order book. Its one thing to see the information visually, but to be able to put it into a format they can use to improve trading and pricing is something different, Stead said.
The FX market is huge, and firms can both save and make money with the right tools. As clients demand increased functionality and sophistication, vendors will continue to be there to help meet their needs.
