Improving Trade Efficiency

Recently over lunch, a trader for a large pension plan said, “The system breaks when we trade more than 100 trades a day.” After asking a few more questions, it became obvious he was suffering from many of the same common investment operations bottlenecks that handicap many traders and he needed help. The lunch went well beyond our scheduled time as we dived deep into the trade lifecycle and identified many opportunities for improvement.

 

Bottlenecks to Trade Efficiency:

Trade Capture & Execution:

Ticket creation in the Order Management System (OMS) is not tied to an Execution Management System (EMS). This introduces duplication of effort to input and execute separately, additional effort to reconcile, as well as increased risk of errors. Often if traders execute orders over the phone and then backfill in the OMS later, they can make an error on the backfill because it essentially feels like a clerical exercise at this point; instead of a value added exercise to initiate the trade.

Trade Confirmation:

Often this process is still very manual and is completed by phone and email. This is not scalable and doesn’t work well across time zones. The result is that many trades are not being confirmed until at least one day after trade date, introducing operational risk; especially if the trade was backfilled incorrectly after it was executed, as per above.

Trade Settlement:

Trade Settlement automatically starts at a disadvantage when the capture, execution and confirmation processes are not optimized. The risk of an error still being in the cycle is higher because the confirmation may not have happened as timely as it should have. Additionally, the process of manually monitoring settlements with custodians/prime brokers requires significant effort.

 

The Solution:

Engage in an end-to-end review of the investment process with an investment operations expert to help identify bottlenecks and opportunities to use some of the tools available to solve these problems. We have extensive experience in architecting and delivering trade efficiencies across all asset classes and a broad selection of technology platforms.

Trade Capture & Execution:

Move to a single point of capture and execution. Using an OMS/EMS that communicates directly with your brokers electronically eliminates duplication of effort to input and execute separately. It also eliminates the need to reconcile and reduces the operating risk of an error on the input, because the trade inputted is the trade executed. There are lots of systems and tools that accomplish this and our experts have worked with many of them.

Trade Confirmation:

The confirmation process becomes better when the capture and execution are combined as above, however adopting an automated confirmation tool is also essential. There are several popular tools available. When you use these tools, your trade goes directly from your OMS/EMS to the tool and the broker goes to the same tool to confirm the trade. The investment operations team only worries about exceptions. With proper management of your brokers to ensure adoption and usage of the tools, it is possible to achieve nearly 100% broker confirmations on trade date with little manual effort. The risk of a settlement error is reduced significantly when the trade is confirmed on a timely basis.

Trade Settlement:

Adopting an industry-standard tool for monitoring settlements should replace manually monitoring trades. Most modern portfolio accounting systems are able to consume secure financial messages from the market, allowing the system to do the work and team to focus on exceptions. Trades flowed automatically from the OMS to the portfolio accounting system with the proper journal entry configured. Then the system watches the market and looks for messages to confirm the trade is matched and to alerts when it isn’t. Likewise, as settlement gets closer, the system automatically settles the trade and alerts of issues. When the trade is settled, the journal entry updates accordingly. Secure financial messages can also be used to reconcile the bank accounts from which the trade is funded; truly giving Straight Through Processing (STP) from end to end.

 

The Results:

Results will vary by organization, however it is possible to support increases in trading volumes by up to 100 times, while still reducing errors and freeing up human capacity. These changes allows investment operations to focus on exceptions and free up time for more value added work.

We recommend metrics and Key Performance Indicators (KPIs) to monitor trade efficiency and quality.  Please stay tuned for our next article on Monitoring Trade Efficiency.

For more information please email: info@wallconsultinggroup.com or call 416.500.1002