Three OEMS implementation models
Weighing up OEMS models
In yesterday’s post, GreySpark Partners assessed several reasons as to why banks may switch order and execution management system (OEMS) provider, while also highlighting the challenges associated with implementing a new OEMS platform.
Delivering a new OEMS implementation poses quite the conundrum for banks, with the bank typically weighing up three possible implementation models that each come with their own benefits and drawbacks. These models are in-house development, an off-the-shelf vendor product, or a broker-provided solution.
Below, GreySpark weighs up the benefits and drawbacks of each implementation model:
1. In-house Development
Description
A firms’ spreadsheets and databases are linked with market data feeds and are capable of sending exports to brokers. The firm utilises fully automated proprietary trading systems for trade execution.
Business Benefits
In-house solutions provide fit-for-purpose functionality, including algorithms, analytics and reporting, allowing for potentially more efficient workflows and better oversight.
Business Disadvantages
Implementation is based on in-house expertise and therefore relies on the sophistication of the requirements specified. Algorithms come with analytical complexity, including algorithmic and basket trading, and synthetic order types. There is also a high cost of observing market regulations, obtaining data and gaining competitive advantage. Traders are required to spend time specifying the requirements.
IT Benefits
Fit-for-purpose with a full in-house working knowledge of its functionality.
IT Disadvantages
Maintenance of technology infrastructure is a burden on internal resources. However subsequent changes are easier and cheaper to make. IT proficiency is based on in-house expertise and therefore relies on recruiting, training and retaining specialist resources.
Costs
Lack of economies of scale in building and maintenance, with high initial IT costs.
2. Broker-provided OEMS
Description
The broker provides the infrastructure to route trade flow.
Business Benefits
Out-of-the-box system, with little or no upfront and continuous costs and quick implementation.
Business Disadvantages
Broker-provided OEMSs are not free in their entirety, with the price being order flow charges that are included in the fee structure. Connectivity cost for brokers must be offset by a quality and high-volume order flow.
IT Benefits
Out-of-the box system, with low implementation and maintenance costs. IT support can divert attention elsewhere.
IT Disadvantages
This implementation model will not necessarily have all required functionality or be integrated efficiently into existing systems. Also, buyside institutions, specifically, may work with numerous systems from various brokers. This can be problematic due to the confusion and lack of oversight that this can cause.
Costs
This model comes with little or no upfront investment. Costs are associated with order flow and fluctuate in line with this.
3. Off-the-Shelf Vendor Product
Description
No reliance on a single broker for order execution; there may be a preferred broker network that the firm utilises through an off-the-shelf platform.
Business Benefits
Out-of-the box system, with customisation capabilities and quick implementation. Off-the-shelf products are broker neutral, potentially providing more execution options.
Business Disadvantages
This implementation model typically comes with high licensing costs and comes with the risk of vendor lock-in, which can provide an opportunity cost and limit a firm’s ability to respond to changing business needs. Additionally, off-the-shelf vendor products may not provide all the functionality and end up making a firms’ technology stack more piecemeal. Bespoke functionalities may also become available to competitors in future releases.
IT Benefits
The quality of service by the vendor is protected by a service level agreement so firms can expect a minimum level of service.
IT Disadvantages
It can be a challenge to find a suitable solution for a firm, with many different options at their disposal. The ‘right’ solution will look different on a firm by firm basis. For example, a cross-asset OMS would require a greater range of functionality compared with the simpler functional scope of a buyside EMS. Additionally, the solution may not meet all business requirements and vendor support may be poor, especially if the vendor has a lack of understanding towards a clients’ core business processes.
Costs
Licensing, support and hosting costs.