Straight Through Processing Solutions for Investment Management

By automating and streamlining the entire trade lifecycle, straight-through processing (STP) enables investment firms to reduce costs, minimise errors, and enhance operational efficiency.

In this article, we focus on STP within investment management and trading. STP could also refer to processing other financial transactions and payments, which we don’t focus on in this article.

Limina is an investment management platform built for efficiency in front-to-middle office workflows. We’ve been investment managers and experienced frustrations with manual and semi-manual processes.

We believe transparent and helpful advice is hard to come by in this industry, so we’ve created this unbiased article. If you want to know more about when Limina might be a good fit for an investment manager, we have an article for you. Equally, if you want to learn when we might not be the right choice, we also have an article on that. 

What is Straight Through Processing (STP)?

Straight through processing (STP) is an automated electronic workflow that enables seamless end-to-end processing of transactions in the financial markets. For example, automated processing in trading and settlement of securities.

STP eliminates the need for manually entered data and re-keying information at various stages of the transaction lifecycle. It’s not a specific system or feature; instead, it’s a form of automation that usually spans multiple systems or service providers.

In the context of trading, STP enables the automatic confirmation and matching of trade orders and settlement of trades.

For automation to be fully trustable, issues must always be flagged for humans to resolve. We call this approach exception-based workflows, illustrated below:

History and Evolution

In the 1990s, financial institutions sought ways to automate. Computers became more popular, and costs came down, enabling the digitalisation of paper-based workflows. At the same time, trade volumes grew, creating urgency to increase efficiency.

Initially, straight-through processing focused on automating individual processes within the trade lifecycle. Over time, the scope of STP expanded to encompass the entire trade process from end to end and span multiple departments. The introduction of electronic trade order management software and standardised messaging protocols (such as FIX and SWIFT) have accelerated STP adoption in the investment management industry.

Benefits of STP Solutions in Investment Management

Implementing straight through processing solutions in investment management offers a range of significant benefits.

Operational efficiency: lower costs & increased scalability

STP reduces labour-intensive tasks by automating manual processes and minimising the need for human intervention. This automation leads to less time being spent on each trade. Since systems are cheaper than humans, the result is cost reductions.

An additional benefit is scalability. STP processes can be scaled up (higher volumes) without the need to increase your team size proportionally.

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STP reduces processing time, which has become increasingly important now that Canada and the US have moved to T+1 settlement. The transaction processing cycle hasn’t been reduced by up to 83%, demanding more from an STP perspective than ever before.

Increased Accuracy

STP contributes to increased accuracy in multiple ways, often alongside efficiency gains. We give two examples of the benefits of straight through processing below:

Area Opportunity Benefit
Eliminating re-keying of data Automatic data transfer between systems and service providers Fewer inconsistencies between systems decrease issues further down the trade lifecycle
Automatically populating implicit data Rule-based engines validate and enrich trade data. They can automatically populate fields (e.g. broker) and perform calculations (e.g. commission) Lower risk of manual errors as less data is keyed in

Audit

The electronic processing of transactions provides a traceable record of all activities. This record enables asset managers to comply with any audit request and to analyse processes for improvements. This transparency also enhances investor confidence in the investment process.

How to Achieve Effective STP

Start by reviewing your system landscape if you want to implement straight through processing solutions in trading:

Buy-side system examples, from best of breed to front to back

 

It’s apparent that the further towards an “all in one” system (fewer vendors) you have, the more straightforward automation and STP becomes. You simply have fewer systems to coordinate and integrate.

Limina IMS and IBOR system modules

A key component to enable STP is post trade management software. You might question why such software is not mentioned in the above illustration. That’s because such software is traditionally partly covered by the OMS and the Investment Book of Record (IBOR).

Post-trade management includes:

  1. Trade allocation
    Suppose you trade a block order allocated to multiple funds or accounts. You then want a system to calculate the allocation based on predefined rules and algorithms (automatically).
  2. Trade confirmation and matching
    Once you’ve executed a trade, an affirmation system compares the trade details provided by you and the broker. I.e. a matching process, to identify any discrepancies. If there are any mismatches, the system flags them for manual intervention and resolution.
  3. Reconciliation
    Closing the loop by reconciling that the admin and custodian have the same view of the transaction as your systems do.

Hurdles to adopt Straight Through Processing for Trading

Challenge Solution Example
Investment workflows scattered across many systems  Change to an investment management software that covers the entire workflow from order raising to settlement
Legacy systems are not capable of full automation Upgrade to a modern system that has the latest automation capabilities
Inflexible connectivity, e.g. reliant on vendors for data integration changes Ensure the investment workflow system you chose has a powerful and configurable import/export engine

Future of Straight Through Processing Technology

We see two technologies that have the potential to transform the state of STP:

  • Blockchain and distributed ledger technology (DLT):
    Blockchain and DLT have the potential to revolutionise STP by enabling real-time settlement, eliminating counterparty risk, and enhancing transparency in trading. Such initiatives have been in the making for several years, but no significant breakthrough has been achieved.
  • Artificial Intelligence (AI) and Machine Learning (ML):
    AI and ML have the potential to automate parts of issue resolution, including communication between humans over email or even phone. The current limitation of AI communication is that the error rate is too high for this type of use case.
    Other uses of AI lie in anomaly detection, where it’s already being implemented.

Conclusion

Implementing an STP system presents its own set of challenges. However, with careful planning, effective strategies, and the right technology partners, investment managers can successfully increase efficiency and reduce operational costs.

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