A 2004 deadline to move to T+1 trading — the completion of trading transactions one day after order execution, rather than within the current three-day requirement — was abandoned last year.
“”These firms don’t have the appetite to wholesale replace their infrastructure and business practices,”” said IDC Canada director of customer segments Jamie Sharp. In place of T+1, the Canadian Capital Markets Association — a non-profit organization aimed at making Canada’s capital market more competitive — is promoting straight-through processing of trades. “”STP is a means to get to T+1,”” said Sharp. And deadline or no, a T+1 regulation is inevitable, he said.
Under current regulations, the transaction is exposed to fluctuations in the market for three days — a potential disaster if there is a large movement in stock prices. The CCMA estimates the annual reduction in default risk of a T+1 regime at $53 million. The total benefit from STP and T+1 will be $190 million a year, the organization believes.
STP is the seamless passing of trade information electronically, system-to-system, to all parties in the transaction chain without human intervention. To front-office staff used to faxing order information through the chain, “”it’ll be a change in behaviour and a change in systems,”” said Barbara Amsden, executive director of the CCMA.
Of the three phases of the trading process — pre-trade, trade and post-trade — the first is the major pain point, said Sharp. Of the investment managers surveyed for the study, 74 per cent flagged the pre-trade phase as a major challenge.
Consider, for example, an ethical trading portfolio, said Sharp. As it stands, there’s no automated way to prevent the manager from dealing in tobacco shares. Getting a handle on all the necessary pre-trade information is a challenge, since it’s distributed through out the office and in disparate formats, said Amsden.
“”It could be paper, it could be books, it could be feeds, it could be dial-up-and-download,”” she said.
“”If you have to keep opening every envelope to see what’s inside, you can’t get to straight-through processing,”” Sharp said.
According to the study, the ISO 15022 data dictionary is emerging as a leading technology standard, as are messaging protocols SWIFT and FIX. IDC sees increasing convergence between the latter two as the ISO standard absorbs them.
While the 800-pound gorilla of the Canadian STP software market may be Financial Models Company Inc. of Mississauga, Ont., the tools of choice are actually data sheets built in Access, Excel or similar desktop applications. It’s not an ideal solution, Sharp said. “”They’re not necessarily built for collaboration or sharing,”” he notes.
The No. 1 area of STP investment will be in software, upgrading trade management systems not currently built for real-time transaction reporting. Hardware and consulting services will follow.
Sharp estimates that brokerages and wealth management firms will make almost $900 million in external IT purchases in 2003. That doesn’t include spending by the Big 5 banks, which will spend some of their $3 billion external IT budget on the trading houses they own.