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
Features : EMS vs. OMS: Key differentiating factors
Andrew YaoFX Product Manager, Portware
Andrew Yao discusses why Execution Management Systems are likely to
play a big role in the FX trading environment and illustrates how
they differ from traditional OMS's.
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.
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
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.
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