Lately, while going through my mail, I'm noticing more and more conferences targeted toward the hedge fund community. Everything seems to be about hedge funds -- regulating them, operating them, selling legal services to them, and more specific to Portware, the tools they use to trade. To that subject, most discussion centers on the execution management systems (EMS) and order management systems (OMS) the hedge funds use. While these technologies grew primarily out of the equities world, the rapid rate of FIX adoption and the move toward more electronic trading in the FX markets has led to a significant uptick in the amount of foreign exchange functionality being integrated into them. Because of this development, its important at this time to clarify the distinctions between the two with specific regard to the FX markets.

There seems to still be a lot of confusion about OMS and EMS technologies, both in the equities and FX worlds. One of the easiest ways to differentiate features when thinking about order management systems and execution management systems is to remember that historically, order management systems did front office work, but really weren't designed for direct trading. Most order management systems were FIX enabled so they could ship orders to brokers to be worked. Users would generate the orders by rebalancing their portfolios, but those orders would be sent to an intermediary, not directly to the market.

Execution management systems on the other hand were created as a mechanism to facilitate direct market access (DMA) trading by the user. As brokers began to let clients use their FIX 'pipes' to get to the market, these systems were provided as the gateway to their plumbing. Since OMSs were FIX enabled as well, they too were soon plugging into the plumbing. That development has led to an increased need to significantly enhance the trading functionality of an OMS.

Convergence
Today, it can be said that both systems are converging and sometimes overlapping in functionality. Therefore, clients are using one or both systems in different ways depending on their workflow and degree of overlap. One of the more common things we see is the EMS serving as the centralized aggregation point for all trading. There can be many different OMSs feeding into this EMS as it serves as the gateway to the Street. With an increasing number of multi-strategy shops opening up, we see more of a centralized dealing desk with the EMS acting as the central system for total trade control.

While OMSs excel at portfolio accounting, analytics, and compliance, EMSs are designed to allow further granularity in order control. Its important that they scale with increased volume, handle high message throughput, and are extensible enough to integrate with other real time feeds such as customized trading analytics. The EMS must be a flexible platform that can be customized to match the different workflows for each trading desk and asset class.

EMS technologies and FX markets
Application of EMS technologies to the FX markets offers a prime example of the level of extensibility they offer. In the electronic, over the counter, world of FX trading, EMSs are being used as a point to source FX liquidity. The EMS is able to connect to multiple counterparties and aggregate all the liquidity in one place for the dealing desk. That, coupled with the granular ability to handle orders, opens up the dealing desk to a whole host of untapped ways to optimize trading. Specifically in FX, a dealing desk could receive all their orders, start netting them in real time, execute the net amounts, and allocate them back to the sub accounts. The EMS, in this case, essentially creates its own market feed based on all the liquidity providers that are setup and allows traders to execute without having to think about each individual accounts or the specific liquidity provider that is being quoted.

In a more induced FX trading scenario, the EMS could be trading non-dollar denominated assets and could be calculating the currency exposure in real time. It could then be setup to send an auto hedge order to the liquidity pools that are currently aggregated on the platform. Rather than just sending the orders out to the liquidity pool, it could be designed to work with instructions such as, flatten out my currency exposure, but don't push it too much until it reaches over $25m. When it gets there, be more aggressive. Execution management systems were designed from the beginning to handle this type of trading. A key differentiation point between EMSs and OMSs will be the degree of control you have over your trading across asset classes, including FX.

Another example of how an OMS and an EMS might work together is that the OMS may have some FX orders across a number of accounts. The EMS would get all the orders, net them together, and trade across the liquidity pools on the platform. While its trading, a user can set up an algorithm to function as a trailing stop which moves the stop prices several pips below or above the value of your current position. Again, the point is, while the OMS provides some portfolio accounting and order management tools, the execution management system does the heavy lifting with respect to trading and order handling.

An important factor to enabling more FX trading in execution management systems is further standardization on communications protocols and how each liquidity provider behaves. This will help weave together all the fragmented liquidity that is around. Moving forward, clients will be looking for whatever liquidity they can get with the tightest spreads possible in all market conditions, so it will become necessary to see more integration with exchange based liquidity sources.

Lastly, clients will also increasingly be using algorithms to auto-trade their FX orders, with the EMS serving as a platform for sourcing the liquidity and building their automated strategies. Because of this, it is crucial that the system is flexible enough to match the workflow and the algorithmic requirements for FX as trading styles evolve over time.

The development of these new technologies has significantly quickened the pace of change in the FX markets. There is a lot to keep track of and new innovations seem to crop up on an almost daily basis. While it can be daunting at times, its important to remember that in the end, these developments will help everyone trade better, which cant be a bad thing.