Mostly… fixed income and cross product eTrading

August 4, 2006

STP and Zero Touch Trade Flow

Filed under: etrading, FIX, STP — holky @ 3:12 pm

While the majority of trades from institutional customers are allocated/split, and the workflows offer a degree of STP, true zero touch trade workflow is still the exception rather than the norm.

Customers measuring their STP rates based on how much intervention was required to get the allocation instructions out the door really are missing the point.  Even if their machine can spit out a fax or telex or email automatically with their allocation instructions and they can count this as 100% STP’d, sellside still have to employ someone to receive and deal with the instruction – as well as placing a manual step in the process which slows everything down, this also increases transaction cost because these human stages do go wrong. Having people in the workflow increases transaction cost for both sellside and buyside, as “people time” is used both sides to deal with trade exceptions that result from the initial human error. So zero touch trade flow needs zero human touch – which means machine-to-machine instructions.

While there should be real interest from both sides in reaching true zero touch trade flow, the paper and people based scenarios above are still definitely the norm. This is not because the technology does not exist. The major fixed income venues (tradeweb, bloomberg, marketaxess, bondvision, and even reuters now) offer their own electronic routes for post trade allocations etc, which are plumbed direct into the dealers trading systems (on the assumption all dealers have chosen to hook them up). But these are not widely used – customers prefer a generic solution that spits out paper or an email.

So is FIX for fixed income the answer in the post-execution space? Not yet, as major accounts have omgeo or their own fax/telex thing setup so they need ‘a reason’ to change. Buyside firms merging then rationalizing their operational effort may trigger this, but if the message to buyside is that alls well and good in (say) euro govvies and lets apply the same to next product set, then surely we’re papering over the cracks, and we need to get the post trade stuff sorted out in order to really progress. So how do we do that?

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