F&O TRADING: DO WE NEED AN OMS?

Jon Batty, Managing Consultant, Technology Consulting at GreySpark Partners examines the argument.

The futures and options trading platform has historically been driven primarily by the need for market gateways and white-labelled, sellside-provided screens to capture their client flow in a DMA (Direct Market Access) style of trading. With margins and commissions being squeezed there is very little ‘stickiness’ from buyside clients who look to switch brokers on a regular basis to save cost.

Whilst there is a high level of electronification within the global futures and options (F&O) space, the market has moved towards a ‘utility model’ where the focus is on industrialisation of the trading process, cost optimisation and efficiency.

Buyside firms, and even the traders within those firms, can have a strong attachment to a specific trading platform (screen) or SDP (Single Dealer Platform), demanding that the brokers provide these systems in order to capture their business. This leads to sellside brokerage firms having very little structure in terms of the trading technology architecture as they tend to offer access via many trading screens and not one single interface in order to compete.

This has triggered the view that an Order Management System is not needed. It’s been a long journey, and generally F&O OMS platforms lack maturity, having been predominantly spawned from a cash equities platform base.

The cash equities OMS space is now very crowded with the platforms highly commoditised and with many vendors offering solutions of comparable capability.

Vendors are now looking at opportunities to diversify and extend these platforms as multi-asset-class solutions. Starting with listed F&O, and then moving on to Fixed Income, FX and Swaps.

Whilst there is a lot of overlap in features and functionality between a cash equities OMS and a listed F&O OMS there will be elements of these platforms that will be less advanced for F&O and will require refinement over time. As product features mature, and competitors emulate the leading vendors, commoditisation of the feature set occurs as product offerings become less differentiated. Clearly, it is the area of least commoditisation that vendors have the opportunity to differentiate their offerings.

The diagram opposite illustrates the features of an F&O OMS and shows GreySpark’s view of the areas of commoditisation by feature set.

The different types of F&O trading systems

F&O trading systems can be broadly categorised as an OEMS, an EMS, or a pure dealing screen. Unlike in the cash equity market, F&O trading businesses are not looking for value-added services like research, sales trading, trading tools, but are focussing purely on cost (per screen). Market access and low touch EMS solutions are what the market will be looking for, at the right cost. Global order management and complex workflow solutions are only important to a niche set of players.

The market is still dominated by dealing screens. These are pure trading terminals, providing straightforward direct market access with relatively simple functionality. With 90% of listed F&O being traded electronically with execution and clearing done on exchanges and CCPs, these dealing screens provide many clients with all the functionality they need.

With e-commerce offerings now expanding from their traditional roots of research delivery and FX trading, more banks are providing the capability to trade listed futures and options via their SDP. However, the most common trend in dealing screens is dedicated vendor market access platforms that allow white-labelled trading screens to be deployed to clients at relatively low cost and with minimal technology impact. There is a significant use of sponsored access (i.e. no-touch direct market access) for the more performance-sensitive trading houses.

EMS platforms are an extension of these dealing screens, giving traders enhanced execution features such as smart order routing and access to trading algorithms. High-touch trading on F&O dealing platforms is now fully commoditised and thus, vendors will compete on the following value-added features and services:

• Availability and customisability of strategies and algos;

• The breadth of the market connectivity.

The provision of an order book is not yet a clear differentiator among clients seeking purely dealing functionality.

F&O OMS usage is only really needed by small set of global banks who have the need to manage global books with complex structures and hierarchies, multiple asset classes and integrated risk margin management features.

What to look for when choosing an F&O OMS

To build an efficient trading desk it is crucial to have both an OMS and an EMS. Both systems should feed each other with information: an OMS manages the client orders and feeds the EMS with execution instructions; and an EMS manages the trading and execution of those orders on the available venues. Once orders are executed, the OMS captures the post-trade status, handles the position-keeping, P&L and any interactions with the back office.

For cash equities this space is well managed and well defined, with many well-integrated solutions covering both OMS & EMS. As mentioned earlier, this is less defined for F&O and solutions have typically focussed purely on the EMS.

Pre- and post-trade reporting are becoming more and more important to trading houses; it is no longer a question of whether a broker has pre- and post-trade reporting, but the quality and level of detail provided. An effective OMS choice should either provide analytical capability or have an effective API (Application Programming Interface) to allow seamless integration with third party solutions.

Licensing of the OMS is always going to be a concern for F&O brokerages. As explained above, the market is still dominated by the distribution of dealing terminals. For an OMS vendor to compete in this space they will need to have a competitive licensing solution that allows the brokers to license external users on a flexible basis without being locked in to long-term, costly contracts.

Above all else, an OMS needs to provide benefits. The ability to manage the end-to-end trading workflow is a critical part of the value chain, and should include tight integration with the clearinghouses, margin management and strong risk management capabilities.

The demands from regulators will continue to grow across all jurisdictions. An F&O OMS solution should provide support for all regulatory change relating to the markets it supports. This can be costly and time consuming and so any selection of an OMS should ensure the vendor has this catered for.

In summary

It is GreySpark’s view that an OMS is slowly becoming a requirement in the F&O trading space and not just a nice-to-have. Unlike its peer in the cash equity markets it has not yet established itself as a mandatory platform in order to compete, but with focus from software vendors and the maturity of solutions that perception will change over time.

Whilst still predominantly a solution aimed at tier 1 and/or global brokers, the expansion and commoditisation of features that support the increasing needs of regulators and buyside clients will only serve to make an OMS solution an attractive requirement for all types of F&O trading desks.

© BestExecution 2014

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