Straight-through processing

Straight-through processing (STP) is an initiative used by financial companies to speed up the transaction process. This is performed by allowing information that has been electronically entered to be transferred from one party to another in the settlement process without manually re-entering the same pieces of information repeatedly over the entire sequence of events. The goal of STP is simple – reducing the time it takes to process a transaction will increase the likelihood that a contract or an agreement is settled on time.

STP was invented in the early 90s by James Karat in London [http://www.wellstobias.com/news/the-king-is-dead/ to describe automated processing in the equity markets. It was also used around the same time by SWIFT, the banking cooperative, to describe automated processing in the payments arena.

While working with the (LSE) on the sequel project, and with the asset manager, LGT A/M, Mr. Karat cites the reason for developing the system as simple. The process before STP was very antiquated: sales traders would have to fill in a deal ticket, blue for buy and red for sell. The order was invariably scribbled and mostly unreadable. Upon receiving the order, the trader would execute on the market a usually incorrect investment. The runner picking up the ticket (in this case, Mr Karat) would input the order into the system to send out a contract note. For example, if the client wished to purchase 100,000 shares, but the trader only executed 10,000, the runner would send out the contract for 1,000. In those days, there was a T10 settlement so any errors were "fixable". However, with the new introduction of T5, the settlement arena changed, and STP was born. Mr. Karat realised that to reduce the exposure of risk, failed settlement, there could only be one "golden source" of information and that the onus was on the sales trader to be correct as he/she had the power to correct any discrepancies with the client directly.

The concept has also been transferred into other sectors including energy (oil, gas) trading and banking, and financial planning.

Currently, the entire trade lifecycle, from initiation to settlement, is a complex labyrinth of manual processes that take several days. Such processing for equities transactions is commonly referred to as T+3 (trade date plus three days) processing, as it usually takes three business days from the "trade" being executed to the trade being settled. This means investors who are selling a security must deliver the certificate within three business days, and investors who are buying securities must send payment within three business days. But this process comes with higher risks through the occurrence of unsettled trades. Market conditions fluctuate, meaning a three day window brings an inherent risk there is an inherent risk of unexpected losses that investors may be unable to pay for, or settle, their transactions.

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Wikipedia