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; however, 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) the Sequal project, and 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 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.
Historically, STP solutions were needed to help financial market firms move to one-day trade settlement of equity transactions, as well as to meet the global demand resulting from the explosive growth of online trading. Now the concepts of STP are applied to reduce systemic and operational risk and to improve certainty of settlement and minimize operational costs.
When fully realized, STP provides asset managers, brokers and dealers, custodians, banks and other financial services players with tremendous benefits, including greatly shortened processing cycles, reduced settlement risk, and lower operating costs. Some industry analysts believe that STP is not an achievable goal in the sense that firms are unlikely to find the cost/benefit to reach 100% automation. Instead, they promote the idea of improving levels of internal STP within a firm while encouraging groups of firms to work together to improve the quality of the automation of transaction information between themselves, either bilaterally or as a community of users (external STP). Other analysts, however, believe that STP will be achieved with the emergence of business process interoperability. As an aside, an enabler of STP is Straight-Through Quality, but this should not be considered a complete solution to STP, as it is just a tool in helping to achieve an STP implementation.
- Business process interoperability
- Electronic trading
- Same-day affirmation (SDA)
- Straight-Through Quality
- "Straight Through Processing - STP". Investopedia. Retrieved 16 February 2012.
- "Frequently Asked Questions on Straight Through Processing". Securities and Exchange Board of India. Retrieved 16 February 2012.
- "STP and Credit Derivatives". Waters Technology. Retrieved 1 September 2014.