Call To Order

Trade order management systems used to be only for the largest buy-side firms. But thanks to STP, T+1 and electronic trading—not to mention rising order flow—TOMS are becoming essential for all investment firms.

There’s no way you’ll get to T+1 without automation," says Brian Seiler, associate director of IT at AIM Funds. That’s why AIM decided to buy an order management system from what was then known as Merrin Financial.

That was back in the old days (i.e., 1997), and AIM was a bit of a pioneer. Back then, very few buy-side firms had a trade order management system. Now, with the pressures of STP, T+1 and electronic trading—not to mention increasing order flow—order management systems are becoming an essential tool for buy-side firms.

Many large firms have already installed off-the-shelf systems or built their own, but there are still hundreds of buy-side firms that haven’t. Now, even smaller firms, like New York-based Fortis Advisors, are installing order management systems.

These firms are automating in order to keep up with their larger brethren. Spreadsheets and redundant manual trade entry are not going to be sufficient anymore. Some of the pressure comes from retail and institutional clients of buy-side firms, who are demanding limber fund performance.

"Clients no longer just accept a spreadsheet every six months," says TowerGroup analyst Dushyant Shahrawat. "When you are at Calpers and someone is running an Excel spreadsheet and charging you 3 percent of assets to run the money, there’s no excuse for that."

Firms aren’t the only ones tapping order management systems either. State Street Corp. has embedded Eze Castle’s Trident into Global Link, its online trading platform. The aim: to make State Street the client’s two-way front door to the electronic market, taking trades and feeding data and allocation information.

"It’s a broad presentation, a portal to deliver lots of State Street products to you," says David Quinlan, executive vice president of corporate development at Eze Castle. Shahrawat says the State Street-Eze Castle deal is unique, but he expects more like it will follow.

Installing an order management system isn’t easy. Fred Dixon, investment administration officer at Fortis, can’t decide which was more painful: struggling without automated trades and compliance or trying to fix the problem. "Before this everything was manual, with lots of inter-office faxing," he says. "It was a nightmare, and I’m amazed it took us this long to fix. But these systems are hard to justify in terms of cost. You have to have the volume, but you can’t handle the volume without one."

Dixon chose to buy an order management system from Charles River and then spent about seven months installing TradeMaster and its ComplianceMaster compliance tool. The improvement was dramatic, however. Now Fortis can do daily reporting instead of monthly, and Dixon worries less about violations. "The worst thing you can do is go out and process a trade, only to find out you’re over a limit," he says.

A far simpler decision is build or buy. Most firms choose the latter. The cost of building an in-house order management system is prohibitive and time-consuming, and time and spare staff are two things most buy-side firms don’t have. "A firm could spend years and $3 million to $5 million developing their own system and not even be happy with it," Shahrawat says.

A third-party OMS, on the other hand, generally costs between $300,000 and $1 million, depending on the level of service taken and whether the vendor spends time on the client site doing professional services consulting or integration.

"It’s a split between the licensing fee, which is a factor of the number of positions, and an integration presence," Shahrawat says. "The MacGregor Group had a huge buy-side client in the second half of 1999 and installed 330 seats, charging per seat. The license fee was $250,000, and the year-long integration presence was $400,000 to $600,000. Then they charged 20 percent of the base licensing fee for maintenance each year."

The amount of time a vendor spends onsite also varies greatly, from eight weeks to two years, says Tom Driscoll, executive vice president of business development at Charles River Development. The challenge usually comes from integrating a client’s legacy systems with the new system.

"You have to create an interface to the existing systems, create default settings, migrate data," Driscoll says. "You can do it in phases, and you try to start with the place that gets the biggest bang with the least amount of effort."

Usually that means a vendor links the trading desks of multi-location firms. One Charles River installation needed 24-hour access and the ability to "pass the book"—transfer live trades from site to site without interruption—with one data center. The vendor took the phased approach, building a desk every two months for a year and a half. "You can’t roll the whole thing out at once," Driscoll says. "Do the first couple desks slow and methodically, then ramp it up."

Firms can also gain access to an order management system on an ASP basis. Many vendors are currently offering (Eze Castle) or planning to launch (Charles River) ASP-delivered packages. "We can leverage service-bureau interfaces with custodians and outsourced accounting in common, in addition to trade order management," says Driscoll.

An ASP is particularly attractive for small firms, which want the automation but not the maintenance and overhead costs required to support a full license agreement. To assuage cost concerns, some vendors sweeten the deal by providing broker connections through proprietary FIX networks, such as Thomson Financial’s TradeRoute, edging closer to the one-stop shop model.

Don McLoughlin, managing director of Rothschild Asset Management, with some $2 billion assets under management, is one client. The firm actually kicked off its relationship with the purchase of Thomson’s Portia portfolio accounting system in 1993 but added OpenTrader last year.

"When we evaluated order management systems it made sense to go with Thomson for integration purposes," McLoughlin says. "We did look at others. It didn’t make sense because we had the Portia. We’d have had to import all kinds of data. You never know what could happen during a data transfer."

Thomson links its I/B/E/S research data, Oasys allocation, DTC settlement, Autex IOI and TradeRoute connections to OpenTrader, representing the apogee of current buy-side vendor vertical enterprise. It also offers each module as a standalone. "We want to be receptive to the fact that you might want OpenTrader and not Portia," says Christy Bremner, director of product management at Thomson Financial Portfolio Solutions Group. "It’s cafeteria style." For those who want a heterogeneous application suite but don’t want to integrate it, Thomson’s professional services group will help with that, too.

The MacGregor Group also provides connectivity through its proprietary FIX network, the MacGregor Financial Network. "The value of [having our network] is having connectivity to a counterparty, rather than getting a piecemeal FIX engine and Oasys connection," says Steve Levy, president and CEO of MacGregor. "We build those connections in through the entire interface. It’s more plug-and-play. In this way, firms achieve not just STP but T+0."

That’s why AIM uses the MacGregor Financial Network. "We use MFN because of the tight integration,"says Seiler, who oversees the system at AIM. "We could use other [FIX networks], but there’s no need to." The network is installed at 100 positions, handling an average of 20 million shares of 200 stocks daily. It runs on a Sun Microsystems server and Sun Solaris with a Sybase database.

Fifty-five firms and 110 brokers now use MFN, up from four firms and 12 brokers in 1997, when the network debuted, says Steven Alepa, executive vice president of networks and electronic markets. Currently, MacGregor is working to make sure the back end is as fleet as the front by building a link to Swift and the Depository Trust Co. and watching developments in market data such as the RIXML research protocol, Alepa says.

Although FIX connectivity is often a sales point, buy side beware: "Connectivity is not necessarily a foregone conclusion," says Sam Johnson, president and CEO of TransactTools, an interface-testing firm that independently hosts pre-production Web pages to check if they truly speak and understand FIX. The firm has been hired by Archipelago and Knight Securities to determine if certain order types can be supported.

"FIX is a standard that is not very well standardized," Johnson says. "If I want a connection to Archipelago, Instinet and NYSE, I have to speak three different versions of FIX. Lots of vendors stop short of providing the whole thing."

Johnson regards proprietary FIX networks skeptically. Although Bloomberg and MacGregor can guarantee a high level of service because they own the private network over which the messages travel, "that makes it harder to connect to anyone else" because of differing FIX lingoes, Johnson says. "Right now on TradeRoute, you sign up and fire away, and whether you are understood by your counterparty is kind of your problem."

Of course, not all order management systems vendors want to be in the network business.

Argenesis, the Tenfold company formerly known as LandMark, provides pre- and post-trade compliance along with its LongView TradeXpress but prefers to outsource for risk analysis and does not own a proprietary network. "Order management is the flagship of our business," says president Michele McGovern. "We’re being pretty careful about focusing on that. We’re not going to reinvent an industry standard in other areas."

Argenesis client J & W Seligman built its own interfaces to legacy portfolio accounting systems, using flat files and a Sybase database under everything. Gregg Weintraub, vice president of business analysis, bought LongView in 1997, before T+1 became a buzzword, to improve the quality of workflow. He appreciated that Argenesis built TradeRoute and Oasys connections into the system and likes its "clean" interface even more.

"Before this we faxed everything," Weintraub says. "Traders had a template to cross out information they didn’t want the banks to see. It seems more than a little primitive now."