Trades at Top Speed

Computerworld - In the name of straight-through processing (STP) of securities trades, financial services companies over the next two years will spend an estimated $6 billion replacing their manual processes by plugging into virtual trade-matching utilities (VMU), installing middleware and integrating front- and back-end computer systems.

In simple terms, STP is the removal of manual processes in the trade-processing cycle, including paper and disparate data systems, creating an unbroken electronic stream of information from the broker/dealer to the clearinghouse. At present, much of the trades process still relies on fax or telephone.

STP includes messaging standards, translation middleware and electronic connectivity among investment managers, broker/dealers, custodian banks and clearing companies. One confusing aspect of STP is its association with T+1, or trade plus one day. T+1 refers to reducing the trade settlement cycle from the current standard of three days to one, and it's dependent on STP's electronic efficiencies.

The Securities Industry Association (SIA), an industry group with offices in New York and Washington, has lead the charge toward STP and T+1. But the Sept. 11 terrorist attacks in 2001 and the economic downturn squelched the SIA's effort to move to T+1 by 2005, as attention and budgets turned toward more critical needs such as disaster recovery, business continuity and regulatory compliance. The SIA stated in July that it will focus on promoting STP by 2004, with no deadline for T+1.

The real incentive to move to STP, the SIA argues, is the return on investment, which could be considerable for many companies.

For example, the Northern Trust Corp. in Chicago went live in August with an e-mail alert system that replaced a labor-intensive fax process for notifying investment managers of corporate actions such as mergers, acquisitions and name changes. The homegrown technology, called Corporate Action Delivery and Response system, took a year to develop and cost just under $10 million. It has reduced the number of employees required for data input by up to 70% and improved productivity by 50% to 60%, says Teresa Parker, who is responsible for securities and banking operations worldwide at Northern Trust.

The Web-based e-mail system runs off a Sun Solaris server, while production data, including accounting programs, runs off IBM iSeries and zSeries mainframes. The Web-based e-mail application is a proprietary program based on Java. It's used for sending securities-related data to fund managers, who are online using either the Society for Worldwide Interbank Financial Telecommunications (SWIFT) industry messaging standard or Northern's Web-based product.

"Before, it took 10 people to process 1,000 trades a day, and now it takes four people," says Parker. But there is risk involved in moving to an all-electronic process. "If you get a trade wrong, the most you're going to pay for is the lost interest on the trade. If you get a corporate action wrong, you might have to sell a security you got by mistake. That could be 17 cents, or it could be millions of dollars," she says.