Order Management Systems Explained

A trade order management system is basically a digital tool for executing and tracking the progress of orders within the securities market.

When brokers want to buy or sell securities, they’ll do this via some form of order management software.

To buy or sell a security, a dealer must place a so-called trade order, which contains a number of details, including:

• Which security is being traded (i.e. its ticker symbol)
• What type of order it is (buy, sell, etc.)
• The size of the order
• Additional order instructions

It’s through an order management software that the dealer will typically execute such a trade order. Most OMS trades use a protocol called the Financial Information eXchange (FIX), which drives the majority of transactions in the securities markets.

In addition to this, the order management platform also maintains a record of open and completed orders, providing everyone with a transparent picture of all securities transactions.

In the finance world, OMS solutions serve a few key purposes.

This ensures that all the securities trades are executed according to the instructions of the asset manager, broker, etc.

Here, OMS provides a view of all the ongoing and completed orders to facilitate accurate transaction settlement.

Order management systems maintain a record of a broker’s customers, their details, and associated securities.

OMS allows traders to evaluate their overall performance and profitability via detailed reporting. Brokers and asset managers can also extract statistics and other indicators to share with their clients.

As if a single acronym wasn’t enough, OMS is often mentioned in the context of two other tools: Portfolio Management System (PMS) and Execution Management System (EMS).

Let’s briefly look at what they are and how they relate to each other.

Large buy-side investors (e.g. hedge funds) often rely on portfolio management systems to maintain an aggregate view of the market positions of their entire security portfolio. In such cases, an OMS is typically an intrinsic part of this portfolio management tool, helping to turn decisions about asset allocation into actionable buy-side orders.

An execution management system can be considered a subset of OMS that’s more responsive and allows for precise, time-sensitive transactions. 

An EMS is especially relevant to daytraders who are interested in making frequent real-time decisions and transactions. But in the context of large buy-side companies, there’s often little distinction between an OMS and EMS. They both end up serving the same ultimate end goal: executing trades based on required market positions.

Unlike the more niche-focused EMS, which appeals to day traders, OMS is typically used by larger institutional investors like hedge funds, asset managers, and brokers. These entities need order management systems to help them manage and streamline transactions at scale. In this space, certain types of OMS can even execute automated trading and allocation strategies based on the broker’s directions.

OMS platforms have become an indispensable part of an institutional investor’s toolbox. That’s because they have a number of clear benefits.

With an order management system, investors can handle huge volumes of transactions across multiple markets and exchanges—all from a single, centralized tool.

OMS tools are capable of monitoring and responding to price changes in real time to execute transactions at the most favorable terms.

Because they log and keep a record of every trade throughout its lifecycle, order management platforms are key in ensuring regulatory compliance and transparency. This makes it possible to spot any suspicious activity or regulatory breaches.

Due to this transparency, OMS also improves communication among all parties involved in securities trading, from portfolio managers and traders to compliance officers.

Thanks to their ability to check and prevent unfavorable or risky trades, these systems also help to reduce the overall portfolio risk.

Finally, because it scales and automates much of the above, an effective OMS will result in significant cost savings associated with managing a portfolio and securities trading.

This goes beyond the total platform price itself. It’s important to look into the details. How many free user seats does the system support? Are there any per-transaction fees or other variable costs?

Is the OMS in question limited in its geographical or market scope? Does it facilitate trades in all types of securities or only specific ones?

In the end, the system is only as helpful as your ability to make proper use of it. Consider how the complexity of its features aligns with your staff’s knowledge and expertise.

Do you need a complete off-the-shelf, standalone system? Or do you need a modular solution that supports your existing tools (e.g. PMS)?