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November 1, 1999

Uninterrupted Trade Flow

By Nick Davidge

The days of processing a securities transaction in a batch cycle are long gone. Nowadays, straight-through processing, or STP, is the objective for securities trading firms. Competitive pressures demand faster order and execution turnaround, immediate access to best execution liquidity sources and timely and efficient settlement processing.

At the heart of STP is a message switch. That switch is part of a message routing network.

Message switches perform an indispensable middleware function by allowing the retention of legacy back office systems and providing a single access point for customers and exchanges. (The switch must operate in an "open" systems environment in order to be effective.)

A variety of transactions, primarily requests for quotes, data look-ups, order routing and trade notification or comparison, must be performed by the parties involved in processing the trade. By using a centralized and controlled approach to message switching, client applications assist this function.

Now let me discuss other sub-components of STP.

The client side is where the messages are created. As you know, equity traders face two challenges: connectivity with sources of liquidity and connectivity with their clients. The FIX protocol is a popular strategy for connecting institutions and brokers. Still, FIX faces its own challenges - as a trading and deal capture system at each end and as a reliable and secure network.

Connectivity for investors, whether through proprietary front ends or Internet accessible Web servers, places new demands on legacy processing systems. The delivery of information may be provided more cost effectively with STP. PC and Web-based connectivity systems are proven business getters.

So where does the message switch fit in? Coupled with open systems, the message switch provides a modular architecture that enables financial institutions to add electronic connectivity while maintaining their investment in back office systems.

Davidge Data Systems provides a Data Communication Applications Programming Interface (DCA) to intermediate FIX-based message structures. This is accomplished at the communications level on the message switch while the institution's FIX system is virtually untouched. For proprietary system messages, Davidge Data distributes interfacing tools like messages, API's and class libraries, which serve as message translators at the institution's trading system.

Historically, listed equity and options exchanges offered automated execution systems. Exchange connectivity is established using communications and message standards that have evolved in an ad hoc fashion. The consensus message standard is the Floor Communications Standard (FCS). The format mimics the data in a paper ticket.

One of the moving forces behind the rapid acceptance of electronic communications networks is the adoption of FIX. The message switch is again a vital cog in disseminating the different exchange formats and communications protocols by providing a layered architecture.

The top layer interfaces with the message routing network. Next comes a middle layer for table-based text substitutions as a message intermediary. Finally, the lowest tier is a configurable communications interface that supports multiple protocols.

It is also important that the message routing network support outbound API's. That's because many brokerages may wish to support in-house market making activities and field new products. Typically, the broker's clearance and settlement system submits the executed transactions to a depositories' and exchanges' comparison systems.

Today's regulatory environment demands an intra-day submission and comparison. The National Association of Securities Dealers uses real-time messaging with its ACT comparison system. The listed exchange systems have moved closer to real-time with T+3, and are now preparing for T+1.

Meanwhile, brokerages still face many challenges in converting their batch submission legacy systems. These have been converted to "intra-day" submission systems as a result of T+3, to more message-oriented processing in to get ready for T+1.

In the end, the goal is to have a single firm-wide message routing network allowing a firm to maintain its legacy trade processing system and customer accounting system. Here are the steps: The message switch takes in trade notifications from both customer and street sides and submits these to the firm system. Finally, the message switch integrates the firm's system interface to comparison submission on a message-oriented, real-time basis.

That's STP, as you might say, at work.

Nick Davidge is the chairman, founder and chief executive of New York-based Davidge Data Systems, a provider of connectivity solutions to the securities industry.