Can two companies share the central trade-matching role in straight-through processing?
By Heather McKenzie
May 2002
Institutional Investor Magazine
How about three or more? This isn,t the way automated trading was supposed to work , but it may turn out that way.
When the world’s largest broker-dealers, investment managers and custodians formed the Global Straight Through Processing Association in 1998, their purpose was crystal clear: They wanted to promote faster clearing and settlement of cross-border trades. Soon they hatched a plan to create an operating company that would facilitate straight-through, or completely automated, post-trade processing. That’s when things started getting murky.
Although the 93-member association’s operating arm, known as GSTP, has made notable progress, it has also run into a number of roadblocks. GSTP’s technological centerpiece, Transaction Flow Manager, remains in a test phase, with an official rollout not expected until September, a year behind schedule.
What’s more, the association’s vision of a single, shared industry utility has long since turned into a mirage. Omgeo, an 18-month-old, for-profit joint venture of the Depository Trust & Clearing Corp. and Thomson Financial, is aggressively marketing an alternative, Central Trade Manager, that is now being put through its paces by about 30 participants in Omgeo’s early-adopter program. Meanwhile, such investment managers as Amvescap, Fidelity Investments and Schroder Investment Management; brokerages Merrill Lynch & Co. and Nomura International; and custodians BNP Paribas and J.P. Morgan Chase & Co. are involved in GSTP’s test. A number of firms, including Bank of New York Co. and Goldman, Sachs & Co., are hedging their bets by participating in both programs.
As if having two rivals competing to play what was supposedly a utility role were not confusing enough, at least one more technology provider , SunGard Data Systems , is poised to jump in. “We know that 500,000 to 600,000 transactions a day go through Depository Trust. That translates into a $1 million to $1.2 million revenue opportunity per day,” says George Reis, senior vice president in SunGard’s financial networks group.
More choices aren,t necessarily a bad thing, but they,re arriving amid tough times on Wall Street. Back-office head counts are down and budgets are tight, making the decision-making process all the more difficult. Because achieving straight-through processing is considered so important, operations staffs are being asked to move forward on these projects despite the cutbacks.
STP is a prerequisite for the T+1, or trade date plus one day, settlement cycle that the U.S. securities industry plans to implement in June 2005. The annual net benefits of automating manual and paper processes and assuring that most transactions settle two days faster than today’s standard will add up to $2.7 billion industrywide, according to Securities Industry Association estimates.
Omgeo, GSTP, SunGard and potentially others are vying to play the role of virtual matching utility, or VMU. If they succeed at pulling their communities together and breaking the fax habit for order confirmations and related messages, then they will be able to match and enrich the orders with settlement instructions automatically and avert possible fails quickly enough to meet the T+1 requirements.
The existence of two or more VMUs poses a problem if firms have to connect to multiple processors. That raises costs and negates the benefits of having a true utility. And the technical complications will send many firms in search of outsourcing help.
One way to lower the hurdles is interoperability , a set of standards that would enable transactions entered in one system to be compatible with another. The U.S. Securities and Exchange Commission has mandated interoperability between GSTP and Omgeo, but their behind-the-scenes discussions have yet to provide a meaningful result.
Joseph Anastasio, a New York,based partner at consulting firm Capco, says that at a recent meeting of asset management industry chief information officers in Boston, the consensus was that there was “too much talk and not enough action.”
Europeans have similar misgivings. Nigel Thomas, London-based vice president of State Street Investment Manager Solutions Europe, says that with the interoperability talks dragging on, many asset managers are “sitting on the fence waiting to see how the VMU plans work out.” But GSTP CEO Jurgen Marziniak disagrees. “The industry is very interested in the TFM, and some players have progressed very far and are fitting the TFM into their software and systems requirements.”
But Marziniak now has his hands full with a restructuring effort. GSTP has taken control of Axion4gstp, the company it contracted to build the TFM, and is now working to expand its sales and service infrastructure.
Richard Hughes, managing director for Europe, the Middle East and Africa at Omgeo, admits that some asset managers aren,t in a big hurry to choose a VMU. But he can live with that: “If there is no clear migration path, we are telling our clients that they do not have to move.”
Montgomery Asset Management has long been committed to STP and viewed the Omgeo early-adopter program as a logical choice, says Susan Hallgren, the firm’s head of operations. “Risk reduction is our No. 1 driver, and cost reduction is also up there,” she explains. Hallgren concedes that there is uncertainty about interoperability, but she’s not overly concerned: “Industry pressures will resolve any issues related to interoperability long before implementation.”
Says Douglas Warrington, a London-based vice president in Citibank Global Securities Services, investor solutions group: “The only solution is to have an in-house facility or software development program that interfaces to both [GSTP and Omgeo]. If others emerge, we may have to interface with up to ten VMUs. This will probably rationalize back down, but the cost will be a big concern for the market.”
For the buy side, Boston-based Macgregor, a leading supplier of trade order management systems, is offering enhancements that “insulate the firms from the complexity and reduce the pain of moving from one environment to another,” says Macgregor STP specialist Andrew Clark. “With menu commands, we could enable them to move from Oasys to TFM, for example.”
If such straightforward fixes are available, is too much being made of the interoperability controversy? “There is a lot of noise about it, but it comes down to, How can I deal with who I want, when I want, without having to worry about a lot of other things?” says Kevin Milne, who was Omgeo’s top officer in London before joining Macgregor in February as international executive vice president. “Few will get to that point themselves.”
