Post-Trade Not Just a Postscript
This entry is part 3 in the series NYFIX: Past, Present and Future
So, what happens after a trade is executed?
The end process of a trade is often seen as the postscript to the execution. All the hype for a trade comes from the vast and lengthy pre-trade vetting process and then the thrill of execution. Once the trade is in the book, not many traders think of the post-trade process at all. As a matter of fact, for many traders, post-trade is handled in the back office and becomes the problem of clerks and other professionals.
As defined, a postscript is an additional remark at the end of a letter, after the signature and introduced by “P.S.”. It can also be thought of as an afterthought – not important to be included in the body of the letter but something of minor importance. However, when it comes to the entire trade process, the post-trade process should not be thought of as an afterthought or postscript. Rather, it should be viewed just as important as the actual trade execution or pre-trade process.
Post-trade processes can be viewed in three parts – allocation, confirmation and affirmation. If any of these isn’t completed satisfactorily then the trade becomes a problem – that can either be rectified or broken. Neither the front-office desk trader nor the back-office professional wants to see a trade broken.
Up to now, the post-trade process has focused on what happens after the trade and is also referred to as the clearing process. During this process, the trade counterparties are examined and made sure each can fulfill the trade, according to Richard Bentley, Chief Product Officer at ULLINK. This vetting is very common across asset classes as the sell-side broker allocates the trade to a particular buy-side account or accounts and confirms with them trade particulars such as cost, size, brokerage fees, exchange fees , taxes, etc. are disclosed and examined.
“The buy-side looks at this process as occurring at the end of the day,” Bentley explained. “The buy-side and sell-side systems must be coordinated to interact properly to either make changes to the trade or complete the balance process.”
But there is a catch to all this – the length of time it takes to complete the post-trade process. Up to now, it has been a very human-centric and lengthy process. Also, often it is not streamlined as counterparties can often have different communication systems, thus adding to the complexity of post-trade processes.
Another factor to consider, Bentley added, was the push to shorten settlement times (T). He recounted how the marketplace has recently moved to , increasing the pressure to complete the clearing process faster.
“As settlement has shrunk from 3 to now 2 days, the pressure to streamline this process has gotten much higher,” Bentley said. “If you wait until end-of-day to collect all trade confirmation and match them up and see if there problems, you actually lose time.”
Also, Bentley said the buy-side wants same day affirmation as the execution, in essence moving from T+2 to either T+1 or even same day.
“If traders can get their trades to clear sooner and avoid breaks in the process, risk can be minimized, reduce their costs and promote further trading,” he said.
So, how can this intricately choregraphed post-trade ballet be made faster, less error prone and more efficient?
The NYFIX messaging system which is already in place and use by the vast majority of both the buy- and sell-side can easily be leveraged to assist in the post-trade process. As Bentley sees it, NYFIX can be adapted to sending electronic messages and getting an electronic response faster to support the automation of the confirmation/affirmation affirm process.
“Now, we can send a series of FIX messages ,” he explained. “Then the sell-side can do the confirm/affirm processes electronically – making it a much faster process. You can automate this entire process and move to end-of-day matching to an almost real-time matching process.”
We’re talking moving from the current T+2 to T+0 eventually, Bentley said. And some of the largest and influential buy-side firms, are in favor.
In the last year, ULLINK partnered with technology provider AlphaOmega to take its technology for the buy-side that provides its matching piece of the post-trade workflow. As Ignatius John, Chief Executive Officer of AlphaOmega explained, his firm via NYFIX gets all the pertinent data from the buy-side firm’s order management system and matches it automatically during the affirmation process, where it can either identify a potential problem or complete the clearing process.
AlphaOmega competes with Omgeo (owned by DTCC) in this post-trade space, which requires its buy- and sell-side clients to subscribe to its Central Trade Matching in Europe/Asia or Oasys Domestic in the U.S. Via CTM, the buy- and sell-side give up their information to Omgeo who oversees the matching. The problem here is that both the buy- and sell-side must be connected to the CTM – meaning one or both will incur additional connectivity costs. For the larger firms lowering costs and having multiple choices was important. But, as John pointed out, for mid- and smaller-sized firms the cost can be more difficult to contend with.
“CTM clearly is not cheap,” John said, who had used the system back from 2007 to 2010. “So, it’s expensive. This goes to the point that smaller hedge funds couldn’t afford the Omgeo infrastructure. Instead, they’d match manually.”
And as John explained, manually meant using their own email systems and spreadsheets, or these smaller firms just dumped the process off to their prime brokers. But entering data manually left the clearing process extremely vulnerable to error or, as John recalled, breakdown.
He told Traders Magazine ‘The trading community should not be exposed to a single point of failure.’ I cannot just rely on only one company.”
The FIX protocol emerged as a viable post-trade solution, John said, allowing the integration of post trade processes with clients OMS trading platforms. FIX based post trade is a natural extension of the trading platform.
“So, leveraging FIX and extending it from a front office solution to a middle office one, wasn’t difficult,” he said. “Now, firms’ have diverse post trade channels and not have a single point of failure. But also, FIX is cheaper as it is already on most trading desks.”
John recalled, 99.0% of the trades that are executed globally were all conducted via FIX. It was hard for his firm and others not to look at FIX as a solution. This was, as he added, a natural evolution in the trading cycle.
Fast forward to the present, firms are looking increasingly for a seamless and efficient post-trade process, which he dubbed “straight through processing.” Using FIX for both the trade and post-trade process moves the industry closer to those goals, John said.
“Now, you can start matching trades intra-day. As soon as a trade is executed it can be quickly allocated and sent off for confirmation and affirmation,” John said. “This means that before the market is closed, if there are some discrepancies the buyside trader and the broker can fix it right away.”
A win-win, John concluded, as using FIX, can not only speed up the post-trade process, lower costs and also reduce multiple layers of risk – counterparty and trading.
And that is something Luke Mauro, Managing Director and Global Head of Operations at Instinet sees too. Given NYFX’s established reputation in the marketplace, a jump from trade messaging to other services such as post-trade seemed logical.
“It is fair to say that any system or vendor that is known can try to expand its services,” Mauro said.
Though his firm uses another vendor for its post-trade services, he didn’t rule out a change as the post-trade space up to now has had few service providers.
“It would indeed be attractive to have competition in the post-trade space,” Mauro added. “We’re always looking for providers to help us reduce costs for our clients, as well as the firm. The post-trade space could use another player but barriers to entry could be difficult to overcome.”
The jury remains out on future gains in e-trading.
Liquidity and data transparency were top buy-side trader worries.
A look at the forces shaping technological advances in the world of data management.
Larger anonymous block orders can be traded in compliance with MiFID II.
Grossman was formerly CEO of Barclays Global Investors.