Straight through processing

Straight-through processing (STP) enables the entire trade process for capital market and payment transactions to be conducted electronically without the need for re-keying or manual intervention, subject to legal and regulatory restrictions and was invented in the early 90s by James Karat in London to describe automated processing in the equity markets; and, it was used around the same time by SWIFT, the banking cooperative, to describe automated processing in the payments arena.

While working with the London Stock Exchange (LSE) on the Sequal 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 processing, as it usually takes three business days from the "trade" being executed to the trade being settled. Industry practitioners, particularly in the US, viewed STP as meaning at least 'same-day' settlement or faster, ideally minutes or even seconds. The goal was to minimise settlement risk for the execution of a trade and its settlement and clearing to occur simultaneously. However, for this to be achieved, multiple market participants must realize high levels of STP. In particular, transaction data would need to be made available on a just-in-time basis, which is a considerably harder goal to achieve for the financial services community than the application of STP alone. After all, STP itself is merely an efficient use of computers for transaction processing.

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