Straight Through Processing to meet today's changing financial services industry

Today's new era of financial services

Is the new era of consolidated financial services upon us? If you're an active participant in today's U.S. capital market you would certainly say that it is. As we are now seeing in the U.S., today's rapid growth, consolidation and advancing technology are all contributing to the development of comprehensive banking and brokerage services right at the fingertips of the investing public. As this market continues to evolve, investors are increasingly demanding more financial products, faster and easier. In turn, the U.S.-based banks and brokerages are being forced to keep pace with this rapid change to satisfy the insatiable demands of this new breed investor. Now, a customer of almost any major U.S.-based online brokerage firm can quickly pull up his/her entire portfolio on a PC, right from the online brokerís web site, and execute buy or sell orders for almost any popularly traded U.S. equity security. Within seconds a confirmation is received that a trade has been executed, and shortly after that, a complete intra-day update of this person’s portfolio holdings.

Initially, the brokerage industry took advantage of emerging computer technology to help the back office operations staff increase efficiencies with handling the growing trade volumes. Brokerage firms that did not want to divert their business focus from selling financial services turned to data processing providers to automate these back office operations.

Technological and business transformations have also facilitated the rapid expansion of electronic trading and the subsequent need for an effective straight through processing (STP) environment. In fact, technology has advanced so significantly during the past several years that the U.S. brokerage business focus has transformed from an exchange-driven, institutionally powered domestic marketplace to a technology-driven marketplace, with equal emphasis being placed on the demands of the individual investor as those of the institutional investor. The retail investor has become a significant force in the marketplace. The retail investor’s new appetite to take risk and build larger and larger nest eggs has spurred the growth of day trading and the dramatic changes taking place in both the U.S. and global capital markets. Now, it's not just the institutional investor, but all types of investors pushing cross-border trading. In fact, the Global Straight Through Processing Association (GSTPA) recently cited that cross-border trading volume is currently at close to 200,000 trades per day and is expected to grow to over 600,000 within the next three to five years.

A Straight Through ProcessingModel for the U.S. Market
ADP has developed and implemented an STP model for the U.S. marketplace that has proven to be one of the most successful in the industry when it comes to staying ahead of changing market conditions and keeping pace with the explosive growth of electronic brokerage. The model provides a completely automated order and trade processing environment with only one initial point of human interaction. This model effectively addresses all of the processing and information delivery needs of the many firms competing in this fast moving and constantly changing environment.

The solution starts with the Front End Server Network (FESNet) Internet API, which interfaces directly with the client’s web server and telephone trading systems to seamlessly authenticate and validate order information and present account-level data to the investor. This interface provides support for real-time order entry, account inquiry and quote functions. Once an order has been received and validated, the system routes the order to the appropriate execution point. After a status report is received from the execution point, a real-time notification message is sent back to the client’s online trading environment with the order status. Once the order is matched, the trade is then passed to the system for processing, and the facilitation of clearance and settlement. This process includes automated links to SIAC, NSCC and DTC for order matching and confirmation. The investor’s position and balance information is also updated in real-time and sent to the BPS Advantage client/server environment at the client’s site. BPS Advantage allows firms to provide customers with the ability to track account information in real-time, right from the firm’s web site, for faster data access, shorter change cycles and improved customer satisfaction. For the investor, this means a seamless trade flow that makes the investing process a simple, transparent experience, which again feeds the continued desire for more integrated and value added services faster and cheaper. For the broker/dealer it means cost effective processing and a freeing up of resources that can be transferred to other strategic initiatives that are focused on growing business.

Global Expansion and the Increasing Need To Outscource
Increasing customer demand and the significant advancements in technology are combining to form a powerful driving force in the increasing globalization and consolidation within the financial services industry. Because of this, the industry is now beginning to see a transformation away from the proprietary approach to securities transaction processing, as its participants strive for a true global straight through processing solution. In the U.S., the globalization and consolidation of the financial services industry has united commercial, private and investment banks from around the world with large retail-based brokerage organizations. Not only must these banks and brokerages compete in a more diverse, globally focused marketplace with new products and services, but also they must continuously update and modify systems to meet both U.S. regulatory and industry requirements. In addition, the EMU, Year 2K, Extended Hours Trading, Decimalization and eventually T+1 are all forcing global institutions to rethink how they operate.

To be successful, these institutions now require a standardized approach to support a global presence. More and more, the outsourcing of standardized transaction processing operations is facilitating further globalization and ultimately straight through processing by eliminating disparate systems and improving cost structures. Outsourcing also allows for significant increases in transaction volume without additional fixed-cost overhead and allows financial institutions to continue to grow, while benefiting from predictable per-trade unit costs.

As we move closer to this globally expanded financial market, the complexity of accommodating various financial instruments and various clearing and settlement systems, not to mention the country-specific regulatory and compliance issues, have all made a complete global straight through processing solution a challenging goal to attain. Today’s financial institutions are forced to address technological innovations that are changing the way they operate. Firms now have access to new methods for handling data acquisition and storage and, as a result, are facing changing work processes and communications, as well as streamlined trade processes affecting both pre- and post-trade executions and settlement.

J. Clarke Gray
Senior Vice President of
Strategic Investments, ADP Brokerage Services Group