Order management systems come into focus as on-exchange OTC derivatives clearing nears

When a hedge fund selects a trading system, there is more at stake than there used to be. Not only are more people involved in the decision but also the final selection must focus on how the system fits into the rest of the business’s operational systems.

The selected system needs to bring together all the stakeholders of a hedge fund business, of which trading is just one, albeit vital, part. Any order management system (OMS) has to deliver on this front as well as provide different modules such as trading, risk and compliance that all fit.

“Historically, it was the traders who would pick the OMS. Now, since the OMS has grown beyond just trading, other stakeholders in the firm are included in the decision-making process. So compliance teams, portfolio managers and chief technology officers, for example, are often all involved,” says Rob Keller, managing director and head of global product management at Eze Castle Software.

The Eze Castle Software trading system ticks the right boxes for hedge funds. One example, according to Keller, is for managers looking to short-sell equities. “As far as stock locating, we’ve built that functionality. That’s another differentiator for us on the hedge fund side: our ability to automatically locate, store and report on a manager’s borrows and stock loan positions.”

Although not a data provider, Eze Castle Software is able to ensure traders can access the information they need and reproduce it on their trading screens. “We will integrate with vendors that have data on stock lending. A lot of the time the data is coming from the prime brokers but it could also come from a third-party vendor like Bloomberg or Data Explorers. We’ll take that data and incorporate it inside the OMS so they can see everything together.” The stock loan module is one of a number of features available on the trading system for Eze Castle’s OMS. Others include real-time analytics for profit and loss, position keeping, exposure and liquidity.

However, Eze Castle Software gives its 300 or so hedge fund clients the option to outsource different tasks to other software providers if they prefer. “It’s very uncommon, because when you integrate multiple systems there are always integration issues and nowadays most firms are looking to consolidate service providers,” explains Keller. “Firms don’t want to call on multiple vendors for an issue that happened between compliance and trading. They want to call one vendor whose support model they trust. Typically we will get both of those groups on our system.”

If there are gaps in Eze Castle Software’s offering, it makes using another provider as easy as possible.

Although hedge fund clients are happy with the offering at present, Keller says technology providers need to be constantly innovating because markets evolve at great speed. Coupled with regulatory controls and prohibitions, this makes for a challenging environment.

For example, the drive for transparency in the over-the-counter derivatives market is the next landmark, believes Keller. “As some of the OTC derivatives products become exchange-traded, it adds complexity on how the Eze OMS will support trading those products electronically.”

“For example credit default swaps require additional coding in order to be able to trade them electronically, settle them properly and clear them efficiently. That’s a challenge for us and it’s a challenge for every order management and execution system.”

Nevertheless, he is confident the company can match demand. “The various advanced trading frameworks that we rolled out several years ago allow us to plug in new asset types fairly quickly and roll those out to our clients in a short period of time,” Keller notes.

For him, the main aim of the Eze Castle’s OMS is to make sure all parts of the hedge fund business know what is going on. The risk is that an update in one area might cause a slowdown in another.

“With respect to trading, there are always new short-selling rules that pop up from time to time. That’s when a client is looking to their OMS provider, or Eze, to make sure that we’re on top of that change and that we’re helping them to facilitate compliance in real time.”

Timing is critical. “You wouldn’t want to put the order in, have to wait a few seconds for the system to say it’s OK or not. It needs to happen immediately. We’ve made sure that happens,” says Keller.

Keller is confident that whatever regulators and evolving markets throw at the industry, Eze Castle Software can to rise to the challenge.

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