Integration: The Wheel That Makes STP Spin
In the 1990s, much of the technology efforts at investment firms were aimed at getting legacy systems to speak to each other, and IT executives' attention was focused on integration and messaging. That strategy gave way near the end of the decade to an effort to move to one-day settlement of trades, or T+1, as it's colloquially known.
The benefits of the new philosophy were thought to be profound - in 2000, Andersen Consulting estimated that investment firms would save $2.7 billion annually by investing $8 billion in new technology. By automating and expediting the processing of trades, Andersen said, the industry would eliminate costly errors and reduce settlement exposure by 67 percent. That lofty goal quickly fell by the wayside with the dot-com bust and stagnant capital markets, and it was replaced by a more modest plan in 2002 to focus on processing stock transactions automatically. Efforts shifted to building a true straight-through-processing (STP) environment within and among investment firms before the industry could consider moving to T+1.
Now, T+1 is back on the table and the philosophy at IT departments has come full circle. Thanks to the Securities and Exchange Commission, which issued a paper in mid-March calling for comments on the benefits and costs of moving to a one-day trading cycle, T+1 - and consequently the importance of STP - are again taking center stage. Comments are due by the middle of June and will surely stir debate once again about the pros and cons of T+1 and STP, which some industry experts say has become a hackneyed philosophy. "We've seen a lot of high-level promises around STP, everything from curing the common cold to ensuring safety from al Qaeda," says Tim Lind, a senior analyst with financial-research firm TowerGroup.
In a recent report, Lind was more critical, writing that "Straight-through processing has become the Frankenstein's monster of financial acronyms. And maybe it's time to pick up a torch and pitchfork and rein in this monster before it bores any more villagers to death."
In an interview with WS&T, Lind stressed that the challenge for investment management firms isn't straight-through processing or one-day settlement. The challenge, he says, is integration and getting systems to speak to one another. "We are a siloed world. The need for integration - people, processes and systems - has never been greater than today."
There are issues around compliance, risk management and retail investing that can only be dealt with by better integration, Lind asserts. "The future of integration is not about the deployment of messaging." It's about enterprise-application integration and moving beyond the simple sharing of data between applications to creating a platform that defines the workflow processes of different business functions, he asserts. And that means continuing to change trading processes and eliminating the costly paper steps that many firms still have in place. Only then will STP be achieved.
But Wall Street has a long way to go for that to happen. In fact, a global survey of 184 financial-services firms conducted last year by Stamford, Conn.-based Gartner Inc. found that not much has changed since Andersen Consulting identified weaknesses in the trade process.
Andersen concluded that "The lack of consistent standards forces a significant amount of human intervention and rework, and introduces errors in the process." It also found that 20 percent of allocations are communicated verbally and 26 percent are submitted via fax or other paper means.
The Gartner survey, which was conducted for the Securities Industry Association, found that 42 percent of securities transactions are paper-based in some fashion. Only 7 percent of financial-services providers say their trades take place in a paper-free environment. And while 8 percent say their trading is entirely paper-based; almost 40 percent manually enter the data at least twice for the same transaction.
Nonetheless, financial-services providers recognize the benefits of automation and straight-through processing. According to Gartner, the average cost of business is expected to drop 33 percent, including a 39-percent decrease in labor costs, due to automation and workforce reductions. The top STP initiatives involve equities, with 70 percent of firms reporting that they have such a project under way.