With recent industry press discussing how weak volumes on the sell-side are driving the consolidation of broker-sponsored EMS platforms, the EMS is rapidly becoming a commodity which means that cost will become the predominant driver for users rather than functionality. We would take this line of reasoning a step further and argue that the buy-side should also look at their OMS providers in a similar light.
From Functionality to Cost: The New EMS Paradigm
Long an entrenched system, the buy-side OMS has evolved to the point where functionality is no longer the dominant factor for most purchasing decisions, with the majority of vendors now having comparable functionality. With no more room to grow, it makes sense that private equity investors would want to “cash out” of a system like BNY Convergex’s EzeCastle, which may precipitate the further scrutiny on stand-alone OMS providers that we are arguing should be an industry best-practice for the buy side manager. The old maxim predominantly used by larger asset managers that “bigger is better” may no longer be in vogue for large OMS providers.
Cost Considerations in OMS Selection
Based on these business realities, another factor that buy-side investment managers should look at is cost, which, by and large, has surprisingly been largely overlooked to date concerning OMS systems. Investment managers should evaluate the cost in percentage terms that the OMS represents relative to their overall third-party investment technology expenses. By doing so they will generally find that the initial cost that they paid for their stand-alone OMS has sky-rocketed to levels that may make them want to think twice about keeping their existing provider for the long term, especially in today’s investment management environment where margins have been compressed and alpha is hard to come by. All of these factors do not even mention the fact that a stand-alone OMS is generally much less efficient than an integrated front-to-back office system, which some specialist buy-side technology vendors now provide.
Embracing Efficiency: Future-Proofing OMS Solutions
All of the above trends should have smarter buy-side firms, especially institutional managers, giving as much scrutiny to their existing OMS providers as they do to other back-office accounting and related investment systems. After all, like the markets, the history of technology typically shows the movement towards efficiency and, based on current industry trends, the stand-alone buy-side OMS may not be the most efficient nor the most cost-effective solution for the current and future needs of most institutional asset managers.