What’s Old Is New Again

The conditions are right for a resurgence of interest in straight-through processing: Industry trading volumes are showing hesitant signs of growth, but margin pressures remain intense, forcing brokerage firms to concentrate on ways to process trades more efficiently. But, STP projects are likely to look different this time around than they did a couple of years ago, when interest in STP last peaked.

"STP will continue, but in a less industry-structured way - not under the umbrella of an industry body," predicts Tom Perna, senior executive VP with The Bank of New York. Instead, companies are working on internal projects to become more efficient amid ongoing cost pressures, he says.

The Securities Industry Association recently stoked the debate by touting the importance of STP in a response to the SEC's concept release on ways to improve the safety and operational efficiency of the U.S. equities clearance and settlement system. Yet, it's unlikely the industry will achieve STP with Big Bang efforts such as its previous T+1 or GSTPA, says Mark Alexander, managing director, head of global transaction and custody services at Merrill Lynch.

"We have to think about STP a little differently, and not only as an industry program," Alexander says. "Some of the STP projects in the past failed because they weren't sustainable economically. STP is more likely to be individual initiatives that make sense."

The biggest problem with an industrywide STP approach, Alexander says, is that many buy-side firms are far behind the broker-dealers in terms of automation and, more important, in their willingness to invest in STP. "GSTPA was a sound idea, but the implementation could not work because there wasn't buy-side consensus it was the right thing to do," he says.

Show Me the Money

Being able to prove a return for any STP spending will be a key criterion as the industry emerges from the market slump of recent years. "The recent downturns mean that firms will continue to be cautious about IT spending in the year to come," says Perna. "But a high proportion of the money being spent is allocated to efficiency projects."

There's no lack of willingness to spend money on projects that make bottom-line sense, Alexander says, adding that "Many money managers don't believe there are adequate pay-offs for industry STP projects and other investments that would make the post-trade process more efficient," he says.

While many market participants have made great strides in improving trade processes, achieving true STP - in which transaction flows are completely automated from end-to-end within a firm, and to and from its counterparties and service providers - remains an elusive goal.

A particular stumbling block on the road to true STP is the continued manual processing of corporate actions. About a year ago, the Depository Trust & Clearing Corp. started a project in this area, which Perna describes as a key area, but a complicated one.

Merrill's Alexander, meanwhile, points to dematerialization of physical securities and matching or affirming trades as STP-related milestones that offer clear cost savings. "The industry has to figure out a way for institutional trades to be either matched or affirmed much earlier than they are in the process, not necessarily on T+0, but certainly very early on T+1," he says.

The largest prospective efficiency gains, however, are in Europe, where fragmented markets create a huge cost-reduction opportunity for the industry, rather than in the U.S., Alexander says.

Whether in Europe or the U.S., there still looks to be a promised land where straight-through processing pays off. It just may take a while to get there.