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November 1, 2003

Portfolio Management Utopia

By Keith Brodhead

Shorter settlement periods mean equity trading firms must move faster and become more efficient. Firms accelerating trade settlement processes are simultaneously attempting to automate procedures for reconciling data as it passes through disparate systems. In response, portfolio management providers are developing automated solutions to handle the difficult parts of trade reconciliation. The latter once required human intervention.

Trading firms have taken steps to evaluate the requirements of straight through processing. Portfolio systems that provide STP streamline the flow of data in trading, reconciliation, portfolio management, investment accounting, and the general ledger. But only fully-integrated modules that seamlessly transport data are now acceptable.

The best portfolio management systems include the checks and balances that ensure the accuracy of automated reconciliation. These systems flag problematic transactions, and automatically notify the appropriate parties during that step of the posting process so that adjustments can be made.

But moving towards STP demands more than technology change. Traders must wean themselves from relying on batch processing and the end of day reconciliation mentality. They must realize that transactions can be automatically evaluated in real time. Traders can configure systems to reconcile transactions as they wish. That's better than hoping that the trends they identified overnight continue during the next day's session.

In addition to streamlining back-end reconciliation, current automated portfolio management systems give traders enough power to analyze real-time trading feeds. Portfolio management systems now absorb stock trade blotter feeds in real-time. But traders need a visual environment that allows them to slice and dice the data.

Fortunately, integrated portfolio systems, including data analysis and report writing tools that do not require the involvement of IT, are putting the power back into the hands of users. Equity traders can now view the incoming transaction data and filter it based on an individual market sector, or any number of other factors to understand the greater context. These real-time interfaces provide, at a glance, color-coded representations of gains or losses in pharmaceuticals, tech stocks, or a single client's portfolio.

Building a single portfolio management system that can connect with the incoming feeds, and export to all of the dependent accounting systems, is the easiest solution. Customizing a single system provides tighter application integration and interface automation. It is better than trying to buy components to interface with each of the disparate systems. When buying off-the-shelf components, portfolio managers may be paying too much.

Visual query tools that graphically depict trends, ratios and aberrations can provide traders and their clients with an edge. Traders benefit from integrated report writers that allow information to be easily exported to other systems for completing independent reconciliation. Traders are likewise empowered by being able to instantaneously customize and create reports.

The latest portfolio management systems respond to the new Securities and Exchange Commission regulations for record-keeping and audit trails. Equity traders are now provided with a thorough audit logging system. That balances the flexibility of exception handling and real-time adjustments with preventing the ability to delete or overwrite previous transactions.

But even today's most comprehensive portfolio management system will need to be integrated with external systems as the industry continues to evolve. For example, corporate action processing is one of the most manual and complex areas affecting portfolio management that has yet to be integrated. Standalone systems are being developed to accommodate corporate action processing, which still relies heavily on unstructured data and faxes. Because of its importance on equities, this integration is a challenge that will be met.

Keith Brodhead is director of strategic technologies

at QED Information Systems, Inc in Marlton, N.J.

The company specializes in portfolio management systems.