Managers look hard at processing to squeeze savings

Money managers are looking to improve trade processing in their ongoing effort to keep costs — and operational risks — down.

"The drivers today are more about stripping costs out through replacing people with electronics," said David Easthope, a securities and investments analyst at Boston-based Celent LLC, referring to the investment industry's efforts to adopt so-called straight-through processing, or STP.

"The other thing is lower (operational) risk on the trading desk," he added. "This is now a front office issue. The front office cares about trades that haven't settled."

Among the leading institutional investors pushing for STP is the $196.7 billion California Public Employees' Retirement System, Sacramento. The system's STP policy cites several reasons for moving to an automated trade routing, execution, settlement and reporting system. They include:

• achieving maximum operational efficiencies;

• eliminating redundant operations and systems;

• minimizing risk and reduce trading errors;

• reducing transaction processing costs; and

• cutting reliance on paper-based payment and documentation.

"CalPERS carries a tremendous amount of influence and weight," Mr. Easthope said. "When they say they want it, the industry has to get it."

Joan Stack, trading manager at the $84.5 billion Ohio Public Employees Retirement System, Columbus, said because trading involves many different pieces — from execution to order management to accounting — getting the industry completely switched to electronic processes is not easy.

"Once we're there, we'll probably wonder how we lived without it, but getting there is not easy or simple," she said, adding that the growth of electronic trading, in addition to cutting trading costs, has pushed the industry along the STP path.

"Trading is becoming so commoditized that the brokers and the buy side (money managers) have to look for ways to cut costs," she added. "The more you can streamline settlement, the cheaper (trading) will be."

Streamlining settlement was the investment management industry's hot topic in the late 1990s when then-Securities and Exchange Commission Chairman Arthur Levitt pushed the industry to move to next-day trade settlement, or T+1, from the current third-day settlement.

Tom McCarthy, a managing director at Depository Trust & Clearing Corp., New York, said the Securities Industry Association, Washington, spearheaded the T +1 initiative beginning in 1999, with the goal of having the securities industry completely on a T+1 standard by this past June.

"It was determined that it difficult to determine the real return on investment" of moving to a T+1 standard, and "there were some obstacles that were tough to cross, so the emphasis shifted to STP," Mr. McCarthy said.

Still, he said, DTCC, which provides clearing, settlement and other data processing for equities, corporate and municipal bonds and other securities, tackled some of those T+1 obstacles, including real-time processing, multibatch trade reporting and other operational issues.

"The focus continues to be more on STP than on any shortened settlement cycle," he added.

Nevertheless, some experts said quicker settlement is important for reducing risk, a point highlighted by the Sept. 11 attacks and, more recently, Hurricane Katrina.

After Sept. 11, Wall Street effectively shut down for a week, leaving millions of trades unsettled. The industry, led by DTCC, worked hard to settle as many trades as possible, but the risk led Mike Brennan, a New York-based partner in the national financial services practice at Computer Sciences Corp., to think the industry should operate on a T+0 basis, or same-day settlement.

"Katrina raised the issue again," Mr. Brennan said "Not that New Orleans is noted as a financial center, but there are financial firms down there, and if you did a transaction on Monday and your offices were underwater Tuesday, those transactions still had to settle."