Straigth Through Processing

Straight Through Processing 3

Introduction 3

History 4

The Trading Process 6

Challenges 8

Settlement Solutions 9

Payment 10

Timetable for Implementation 11

My Thoughts 12

References 13

Straight Through Processing

Introduction

Straight Through Processing (STP) touches many facets in the Financial Markets. I will examine STP from a financial market point of view (namely the AMEX, specifically Equities trading) and also from a Firm's position.

The Securities Industry Association (SIA) defines STP as "The process of seamlessly passing financial information to all parties involved in the transaction process, spanning the investment manger decision through to reconciliation and statement production, without manual handling or redundant processing in real-time" . When fully implemented, STP will provide operational efficiencies, regulatory compliance, lower costs, enable higher transaction volumes, reduced head-count, and improved customer service. Presently it is estimated that 42% of all trades are still conducted on a paper basis . All of this manual intervention increases costs, requires higher staffing levels, and opens the door for human error. STP will mitigate operational risk and improve performance and will become a necessary condition of doing business in a streamlined globally driven securities industry. This initiative is a formidable one because it represents a radical rethinking of the technology and processing infrastructure for all participants.

History

In the late 1960's and early 1970's the volume of transactions at the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) was growing at a tremendous rate. The shear volume of paper that was generated each day and the physical effort that was required to execute, compare, and report the trades was slowly crushing the industry. In July of 1972, the Securities Industry Automation Corporation (SIAC) was created as a wholly owned subsidiary of the NYSE and AMEX. SIAC is the technology subsidiary of the NYSE and AMEX, with responsibility for the design, development, implementation and operation of the two exchanges' computer systems and communications networks . SIAC operates clearance and settlement systems on behalf of the Depository Trust Clearing Corporations (DTCC) and Options Clearing Corporation (OCC) and also disseminates U.S. market data worldwide.

In the early days, member firms delivered magnetic tapes to the SIAC data center each night and SIAC compared the trades and sent data to the Clearing Corporations and back to the member firms. Reports were created and delivered to member firms and also to the floors of the two exchanges. This method required much physical movement of data (magnetic tapes and reports) both into SIAC and back to the firms. A great deal of coordination was required to harmonize the different firms' inputs and outputs during each nights processes.

During the early to mid 1980's data communications improved to the point were data could be transmitted electronically to and from the firms. Also, computer systems were developed that operated in a real-time environment allowing the firms' back offices real-time access to the market information.

The communication between the different firms and SIAC used point-to-point circuitry with a variety of different access protocols. There was no single communication protocol in place, so SIAC was connected to the various firms using the preferred method of the individual firm (TCP/IP and SNA are examples of two communication protocols). Small firms used dial-up modems while larger firms had dedicated communication lines installed. These communication lines eliminated the need to physically move the data between the firm and SIAC.

SIAC recently undertook the development of the Secure Financial Transaction Infrastructure (SFTI). SFTI offers the financial industry a new way to connect to the trading, clearing, settlement, market data distribution and the other services that SIAC offers. Once connected to SFTI, firms have the ability to connect to other firms through SFTI, all of the exchanges (NYSE, AMEX, CBOE, NASDEQ, BOX, etc.), and all settlement and clearing systems at SIAC and DTCC . With this infrastructure in place communication from entry to settlement is seamless.

The Trading Process

There are three parts to a trade: Entry, Matching, and Settlement. Entry is when one side of the trade is entered, a buy or a sell. This buy or sell is entered into the system at an ECN (Electronic Communications Exchanges) or sent to a broker on the floor of the NYSE or the AMEX. When the other side (buy or sell) of the trade is completed and entered into the system, the trade is matched. This is when all parties agree on the terms; pricing, quantity, date, time. Once a trade is matched it is passed to DTCC (equities) or OCC (Options) for Settlement. All of the trades for each day are summarized by firm and each firm's net position (balance that the firm owes or balance that the firm is owed) is generated each night.

Each day DTCC processes over 17.5 million transactions. These transactions are equity and fixed income trades from the NYSE, AMEX, NASDAQ, and the ECN's. OCC submits its settlement information to the National Securities Clearing Corporation (NSCC) which is part of DTCC. These transactions were sent in batches during the day, but for STP to succeed; these transactions must be received real-time. DTCC has developed a real-time trade capture system and in July 2000, the NYSE (which represents about 45%) of the daily volume) began submitting compared trades to DTCC in real-time. By November of 2002, all NYSE equity trades are submitted real-time. In January 1999, the NASDAQ began submitting 5 daily slices of trade data. During 2003, NASDAQ began submitting all of its compared trades to DTCC real-time. The AMEX has been submitting its trade data real-time since the third quarter of 2002. The smaller ECNs submit over 95% of their trades to DTCC in slices during the day .

Fixed Income trades required a Real-Time Trade Matching (RTTM) system to be developed. This system generates immediate notification