Report: STP proponents neglect business objectives

Some mutual fund companies, such as Legg Mason Inc., are seeing business benefits after installing straight-through processing (STP) technology. But efforts within the financial services industry to promote widespread adoption of automation by investment managers still face big challenges.

For example, a report released in October by TowerGroup in Needham, Mass., claims that the campaign to sell so-called buy-side firms on auto-mated systems that can support the seamless flow of stock-trading data within and between companies has failed. STP proponents have neglected business objectives while extolling the virtues of technical integration, the report said.

For example, backers of the technology haven’t done enough to show how STP can help investment managers provide better customer service and add CRM capabilities, according to TowerGroup analyst Timothy Lind.

STP has become the “Frankenstein’s monster of financial acronyms,” Lind said in the report. “Maybe it’s time to pick up a torch and pitchfork and rein in this monster before it bores any more villagers to death.”

Jane Soybelman, chief technology officer at Asset Management Technology Solutions, an IT subsidiary of Baltimore-based Legg Mason, agreed with the report’s contention that the potential benefits to mutual fund companies haven’t been adequately explained. “People need to agree on what STP means for everyone,” not just for sell-side brokerages and banks, she said.

Legg Mason, which manages about US$200 billion worth of assets, last year installed middleware from New York-based Heliograph Inc. to automate its back-end trade-clearance process. It also standardized on an order management system and two messaging formats – ISO 15022 and the Financial Information Exchange – for communicating during the post-trade settlement process with custodian banks that hold stock and bond certificates for clients.

Soybelman said the company has already seen a return on its investment, which was under US$1 million. She added that she expects to save millions of dollars over the next few years through the continued elimination of manual processes and a reduction in administrative personnel. “I definitely try to convince my clients (in Legg Mason’s business units) that if STP is done right on the buy side, it can have a great deal of be-nefits,” Soybelman said.

The effort to promote STP has mainly been led by the New York-based Securities Industry Association (SIA), which acknowledged that mutual fund companies and other investment managers lag far behind brokerages in adopting STP technologies.

The SIA has set a 2005 target date for achieving the key objectives of STP, such as electronic trade allocation and matching. John Panchery, managing director of the SIA and its STP project manager, said that about 80 per cent of buy-side firms are still using phones and fax machines to relay order information.

“But as long as we have the systems in place (by 2005), the business drivers will be able to force firms to understand the value of automation,” he said.

Panchery called the TowerGroup report a “good constructive comment,” but he said that the SIA has made considerable strides in working with buy-side firms to educate them on the benefits of STP.