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Robert Schuessler
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A Smarter Monkey

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March 1, 1999

Moving Market Data Without Interruption What's the Fixation on Straight-Through Processing?

By Monica Simms

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  • Moving Market Data Without Interruption What's the Fixation on Straight-Through Processing?

Are equity-trading firms going to achieve inter-networking nirvana? Well, not immediately, but the signs are encouraging.

Wall Street calls it straight-through processing, or STP.

And STP is catching on as more firms use systems that substantially reduce costly manual intervention in the trade cycle.

From order initiation to execution, and ultimately to the clearance and settlement of trades, in the ideal world STP allows an uninterrupted, or a straight-through flow of data across electronic systems.

"I think these types of solutions will help us get to T+1," said Anders Nilsson, manager of international products at Jones & Associates in Boston.

Currently, trades in the U.S. market are settled three days after execution. The industry is pushing to move the cycle from three days after trade execution to one day, or T+1.

Pervasive

STP will eventually speed up the flow of information within an organization, affecting everyone, including global agents handling cross-border trades.

"As well as that, [STP] frees up sales people and traders to be more relationship-oriented than transaction-oriented," said Lawrence Tabb, group director of the Tower Group, a Newton, Mass.-based securities-industry consultant and research firm.

With firms moving closer toward a full-fledged paperless STP environment, there are other benefits that do not escape traders' attention.

Nilsson said that in contrast to a cumbersome paper-intensive environment, STP signically helps a desk to store historical records. With STP, information captured on an order-management system and trade blotter, for instance, can be used for longer-term competitive purposes. The blotter is used to show the trader's orders.

As more buy-side and sell-side firms in the U.S. automate and end their reliance on telephone-based communications, two technologies are contributing to STP: FIX, or the Financial Information Exchange protocol, and the World Wide Web.

FIX is a standardized messaging format for equity-trading firms, that lets computers at each firm communicate back and forth. Among other things, FIX allows them to handle pre-trade information, such as indications of interest and notices of execution. FIX runs on several types of LANs, or local- area networks, over private lines.

Pioneers

Some trading desks have now started using FIX to send and receive data inexpensively over the Internet. On the buyside, the pioneers include New York-based Credit Suisse First Boston and Kansas City-based American Century Investment Management. Firms use virtually impenetrable encryption, authentication and other technologies for security.

Trading desks are increasingly using the Internet for sending e-mails, and for transmitting trade orders and indications of interest.

But Internet-based processing remains limited to some frontoffice activities, while backoffice processing, such as trade clearance and settlement, remains off limits. That's because traders still prefer secured messaging alternatives for time-sensitive activities, such as bids on trades and trade confirmations.

"When I say time-sensitive, I mean fractions of a second," said Mike Cormack, manager of equity trading at American Century. "That's important on our desk. If somebody bids me a quarter for a hundred- thousand shares, I want to be able to get there as quickly as possible."

"I'm just not comfortable sending that data over the Internet," he added. "It's not a big deal if a trade allocation takes a couple of seconds. But outgoing trade commitments are a different story."