Straight-through processing

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Straight-through processing (STP)[1] is a method used by financial companies to speed up the transaction process. It was developed in the early 1990s by James Karat in London to describe automated processing in the equity markets.[2]

Background

While working with the London Stock Exchange (LSE) on the sequel project, and with the asset manager, LGT A/M, Karat cites the reason for developing the system as simple. The process before STP was very antiquated: sales traders would have to fill in a deal ticket, blue for buy and red for sell. The order was invariably scribbled and mostly unreadable. Upon receiving the order, the trader would often execute an incorrect investment on the market. A runner picking up the ticket, such as Karat, would input the order into the system to send out a contract note. For example, if the client wished to purchase 100,000 shares, but the trader only executed 10,000, the runner would send out the contract for 1,000. In those days, there was a T10 settlement so any errors were "fixable". However, with the new introduction of T5, the settlement arena changed, and STP was born. Karat realised that to reduce the exposure of risk, failed settlement, there could only be one "golden source" of information and that it was the responsibility of the sales trader to be correct as they had the power to correct any discrepancies with the client directly.

According to Karat, the goal of STP is to reduce the time it takes to process a transaction, in order to increase the likelihood that a contract or an agreement is settled on time. The concept has also been transferred into other sectors including energy (oil, gas) trading and banking, and financial planning.[1]

Currently, the entire trade lifecycle, from initiation to settlement, is a complex labyrinth of manual processes that take several days. Such processing for equities transactions is commonly referred to as T+2 (trade date plus two days) processing, as it usually takes two business days from the "trade" being executed to the trade being settled. This means investors who are selling a security must deliver the certificate within two business days, and investors who are buying securities must send payment within two business days. But this process comes with higher risks through the occurrence of unsettled trades. Market conditions fluctuate, meaning a two-day window brings an inherent risk of unexpected losses that investors may be unable to pay for, or settle, their transactions.

Industry practitioners, particularly in the United States, viewed STP as meaning "same-day" settlement or faster, ideally minutes or even seconds. The goal was to minimise settlement risk for the execution of a trade and its settlement and clearing to occur simultaneously. However, for this to be achieved, multiple market participants must realize high levels of STP. In particular, transaction data would need to be made available on a just-in-time basis, which is a considerably harder goal to achieve for the financial services community than the application of STP alone. After all, STP itself is merely an efficient use of computers for transaction processing.

In the past, STP methods were used to help financial market firms move to one-day trade settlement of equity transactions, as well as to meet the global demand resulting from the rapid growth of online trading. Now the concepts of STP are applied to reduce systemic and operational risk and to improve certainty of settlement and minimize operational costs.

Common misconceptions

There is often confusion[according to whom?] within the trading world between STP and an electronic communication network (ECN). Although they are similar initiatives, ECN connects orders with those of other traders as well as man liquidity provides. An ECN is also typically a bigger pool of orders than a standard STP.

When fully implemented, STP is able to provide asset managers, brokers and dealers, custodians, banks and other financial services with benefits including shorter processing cycles, reduced settlement risk, and lower operating costs.[3] Some industry analysts believe that STP is not an achievable goal in the sense that firms are unlikely to find the cost/benefit to reach 100% automation.[4] Instead, they promote the idea of improving levels of internal STP within a firm while encouraging groups of firms to work together to improve the quality of the automation of transaction information between themselves, either bilaterally or as a community of users (external STP). Other analysts, however, believe that STP will be achieved with the emergence of business process interoperability.

See also

References

  1. ^ a b "Straight Through Processing - STP". Investopedia. Retrieved 16 February 2012.
  2. ^ http://www.aspectenterprise.com/wp-content/uploads/STP-Infographic.pdf
  3. ^ "Frequently Asked Questions on Straight Through Processing". Securities and Exchange Board of India. Retrieved 16 February 2012.
  4. ^ "STP and Credit Derivatives". Waters Technology. Retrieved 1 September 2014.

Correct Link for reference 2 is below http://www.sebi.gov.in/sebi_data/faqfiles/jan-2017/1485846723481.pdf

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