Achieving STP in the Securities Industry

Cut costs. Streamline processes. Reduce errors. Keep pace with evolving industry standards. These are the challenges securities firms face as dramatic changes sweep through the industry. New market entrants, such as online brokers, banks and global competitors are driving fee structures down, making it vital for brokerage firms to reduce costs. Exponential growth in trading volumes is pushing existing trading systems and processes to capacity and increasing settlement risk. The Securities and Exchange Commission expects US firms to attain T+1 (the ability to settle a trade one day after the transaction) by June 2004.

The SEC’s call to shorten the settlement period to one business day after the trade may require that many financial institutions--broker/dealers, asset managers, custodians and clearing corporations--reengineer the trade process entirely. While clearly a challenge, the move to shorter settlement cycles will provide tremendous benefits for securities firms. First, it will reduce the value of outstanding settlement exposure for the US financial services industry by as much as $250 billion on a daily basis, according to the Securities Industry Association’s report, "." Secondly, it is estimated that the increased efficiency that comes with T+1 will generate approximately $2.7 billion in pre-tax annual net benefits, distributed across the different trading participants, according to the report.

STP, the move to automate the trade process from initiation to execution to settlement, promises to help firms ride this wave of change successfully and profitably. STP enables orders to be processed, confirmed, cleared and settled in a shorter time period, more cost effectively and with fewer errors than other traditional methods (i.e., phone, fax or e-mail) that require human intervention. It is this human element that slows the trade process, introduces errors and delays settlement.

While the benefits of STP can be enormous, most securities firms are struggling with how to achieve it. Because STP touches each part of the trade process, it requires integration of systems and applications within the enterprise as well as the ability to process information across multiple formats and communication protocols. Additionally, in implementing an STP platform, firms must not only take into account today’s standards, such as FIX or ISO 15022, but they also need to be ready to handle future standards, such as axion4. Few integration tools are mature enough and flexible enough to manage all of these functions.

In addition to the need for a flexible integration architecture, scalability of the solution is a serious issue. There are few reliable benchmarks for testing integration tool scalability. The reasons for this include the inherent complexity of integration scenarios and the inclination of vendors with older hub-centric architectures to avoid the issue. Integration solutions are either scalable or not scalable; there is very little room for in-between solutions in the coming world of pervasive computing. The criterion for scalability is whether the architecture presents any limitation to increasing performance linearly simply in proportion to the available computing resources.

In the early stages of automation, many firms used point-to-point integration solutions to open a unique line of communication between two applications at a time or between two partners. Point-to-point integration was time-consuming, expensive and failed to support the fluid nature of the trading environment. A request to buy shares in a stock would set into motion a series of sequential and simultaneous information requests. To create a trade request, a fund manager would need to pull information from a number of back-office systems, such as a trading system, a portfolio accounting system, a portfolio information system and a securities master file. To electronically place the order with a broker, that information would then need to be converted into FIX. In addition to laying numerous "lines" to enable applications to share information, firms found it necessary to create unique interfaces for each application so that information could be generated in the specific message formats required. If a new system was deployed to replace an older mainframe system, it became necessary to recreate the interface between the partner and the new system.

Alternatively, some firms employed the use of hub-and-spoke application integration tools. With this architecture, an integration server acts as the communications "hub" and handles the message management for the entire organization. Integration spokes are linked from the integration server to each application. While this is a more effective way to integrate information than point-to-point, the hub-and-spoke approach offers two critical drawbacks: scalability and availability. First, communication of information is limited to the bandwidth of the integration server, a potential problem as trading volumes continue to increase. Secondly, the hub represents a single point of failure. Using this architecture, a global securities operation with its "hub" in New York would require all trades to be processed through the New York office. As a result, if the hub goes offline, even for a few moments, trades in all of the company’s offices worldwide would be affected. In addition, most firms using hub-and-spoke integration tools focused solely on the integration of applications within the enterprise. The broker, the fund manager and the custodian would be able to gain access to all the information needed; however, they would still need to fax that information to partners and input information sent by partners back into the system manually.

What securities firms have found is that STP requires a full-scale integration that addresses three areas: integration of business processes with back-office systems; the ability to dynamically manage multiple relationships and address multiple industry standards; and the integrated, end-to-end view for the monitoring of all trade processes.

A full suite of integration solutions with a distributed, scalable architecture will enable securities firms to streamline and automate trade processes within the institution and with trade partners more quickly and cost effectively. This approach works in concert to deliver the functionality that firms need to be able to take on new partners, respond to emerging industry standards and deploy new services. Securities firms are cautioned to evaluate integration tools very carefully for their flexibility, adaptability, scalability and maturity before choosing a product.