Straight Through Processing is a concept that may be familiar to anyone who has invested in public securities. Unlike many private security transactions, public securities transactions are largely completed online with little to no manual, paper-based work required.
Straight Through Processing, which originated in the 1970s to enable public stock trading through computer networks, is a concept designed to let financial companies automate transaction processing through the use of online workflows.
According to Ayesha Khanna, author of Straight Through Processing for Financial Services – the Complete Guide, the original goal of Straight Through Processing technology was to shorten the processing cycle, which at the time was 3 days or more from the trade date, down to a single day or less. The adoption of online trading drove fees down, as transactions became cheaper and faster to process, and interest in public trading skyrocketed.
Since then, Khanna says, Straight Through Processing has come to stand for the automation of “all processes related to the trade lifecycle of financial securities, including equities, fixed income, and derivatives. …It constitutes an end-to-end streamlining of operations within and across firms.” Automating manual processes enables companies to address security concerns, increase transparency, and decrease time-consuming errors relating to not-in-good-order (NIGO) documents.
Khanna also notes that the Straight Through Processing ideal cannot be achieved with partial adoption. Each link in the chain, including sponsors, advisors, broker-dealers, custodians, fund administrators, and third-party vendors, has a responsibility to adopt process improvements. If firms cannot integrate and communicate, the automation is inherently partial, as are the benefits.
Other industries have seen the improvements that automating manual processes can bring. In the insurance industry, firms who have adopted automation technology have seen up to a 65 percent reduction in costs and a 90 percent reduction in turnaround time on key processes, according to a group of McKinsey principals and partners experienced in the industry.
While it has been widely adopted by the public securities market, Straight Through Processing has yet to fully take hold in private and alternative markets. According to SEC data, nearly all of the $1.7 trillion invested into private offerings under Regulation D in 2017 was processed manually, with paper documents being mailed or faxed between sponsors, investors, and their representatives.
If the accredited investor definition were adjusted or the rule abolished, the private placements investment industry could be faced with a problem of too many investors to process manually. Companies utilizing exemptions open to the public, like Reg A and Reg CF have already faced this problem, and have turned to funding portals and technology solutions.
But issuers, advisors, and intermediaries don’t need to wait for investors to force their hand. Automation solutions can already be used to reduce administrative costs, mitigate cybersecurity risks, and increase transparency, while providing investors with an improved user experience designed to change the way they look at investing.
How technology can bring accuracy, security, and speed to alternative investments.