More and cheaper connectivity choices and an increase in international investing are pushing smaller money managers toward increased STP automation.

Smaller asset managers – think at least a few ranks below Fidelity – once the missing link in straight-through trade processing – are now spoiled for choice in STP solutions. Services bureaus, SWIFT, order management system vendors, and custodians are pursuing their business, offering them relatively inexpensive ways to connect to counterparties and use standard messaging for automated trading and post-trade processing.

Small long-only shops with limited trading could get by with phone or fax to brokers who were ready to support manual processes to get and keep their business, and many have stuck with manual processes. These habits have often persisted even as the firms grew in size and trading volumes. At the SIA operations conference this spring, TowerGroup analyst Tim Lind quoted an SIA executive’s description of asset managers, apparently some years ago, as “cheap and lazy.”

Now, however, they are running out of excuses.

Brown Brothers Harriman (BBH) has set up a service, called Infomediary, which provides a hub that asset managers can use to connect to counterparties through SWIFT or Radianz, the financial services secure network that BT acquired earlier this year. Fund managers don’t need to buy or invest in their own communications hardware and software to get STP between their internal systems and their external service providers. They get onto the networks through BBH's connection, where sixty-two fund managers have signed up.

Order management system vendors, such as Macgregor, Charles River, and FMC, have extended their services to include post-trade communication with SWIFT.

FMCNet has recently been named an electronic trade confirmation (ETC) provider by SWIFT, which means it can provide users with a wide range of securities message types among all the parties to a transaction. Until now, only Omgeo had this ETC status.

Other trade order management systems, and some portfolio management vendors, are also extending their services to post-trade processing.

New Solutions Address the Cost Factor

Andy Clark, senior vice president of STP solutions at Macgregor, said cost was a big reason that asset managers were not joining SWIFT.

“SWIFT does have a large price tag,” he explained. The costs are not only joining, but installing the hardware and software, making the connection, and doing the testing. For an asset manager with a small staff, that can be just too much.

Besides, when an asset manager sends a fax off to a counterparty, he’s done his bit and now the STP burden is someone else’s responsibility. If an asset manager sends a fax, it costs him next to nothing, but if he uses SWIFT he has to pay for the message.

Custodians, though, are reluctant to charge asset managers for non-automated information flows because they want to keep the business.

“So if a custodian wants the asset manager to send trade information [in an automated way], the asset manager pays, not the custodian,” explained Will Clemens, vice president of Advent’s STP group. The FIX message standard is free, which makes it popular with asset managers. And, because it leads to straight-through processing for them, counterparties will often subsidize the FIX line to an asset manager.

“But you are starting to see some indications that at some point they will say it is just not profitable to take the unautomated investment managers, the ones who think the fax machine is automation,” Clemens said. Then the custodians will offset their costs by charging higher prices to firms that aren’t fully electronic.

Macgregor, like several other firms, has developed a service bureau that provides the infrastructure, telecommunications, maintenance of connection, and upgrades whenever SWIFT sends out a new release. It will take trades from any order management system and can link to Omgeo Services to match a trade and then send it off through the SWIFT network. Clients manage their business through a browser.

“Our clients don’t need a SWIFT guru to keep current,” said Clark, who believes the services bureau approach offers fund managers a choice they like: It isn’t a full lift-out like State Street does, so the managers continue to have control.

“We are a financial technology provider offering end-to-end execution processing for the buy side,” he explained. “This is an ASP model that allows firms to maintain control. They continue to manage their exceptions and deal with the brokers and traders to resolve them.”

About 80 percent of new SWIFT clients are now coming through service bureaus, a reversal of the percentages just a few years ago when 80 percent joined directly, he added.

Connecting for Investments Abroad

The flurry of activity around SWIFT and international connectivity comes as an increasing number of American fund managers are investing abroad.

“Just in the last year we have seen a large number of shops that were domestic moving into the international space to broaden their product offering,” said Tom Driscoll, vice president of sales and marketing at Charles River Development, an OMS provider. The dollar’s vulnerability has increased the interest in overseas investment.

“About 20 percent of our US customers are doing cross-border investing, and the number is growing quickly,” he said. Charles River has expanded internationally – with 155 clients, it has 35 in Europe and 25 in Asia-Pacific.

“To be a successful vendor in the mid- to high-end of the market, you have to be global,” said Driscoll. “Even smaller hedge funds are opening satellite offices in Europe and Asia, and they expect support.”

Eze Castle, another OMS provider, finds that 30 to 35 percent of its clients are now trading internationally.

“We are very much geared to servicing US money managers, but a lot of these guys are trading international markets,” said David Quinlan, president of Eze Castle. He finds the markets in a period of rapid change.

“You watch what is happening with the exchanges, LiquidNet, Pipeline and all the other tools, Reg NMS – throw it all in the pot and you have an unknown landscape,” he explained, in a colorful mix of metaphors. His company has developed Tradewinds, with a standard library of interfaces, which can serve as a post-trade service bureau that provides a connection to SWIFT.

For most of the asset managers in the US, SWIFT is largely irrelevant.

“Swift works very well for the top of the pyramid,” said Clemens at Advent, which focuses on the smaller asset managers. “But the industry is much bigger than that. There are lots of custodians and lots of money managers who aren’t on SWIFT.” Advent offers Advent Custodial Data, which can take feeds from custodians, reformat it and add data for reconciliation and investment performance that asset managers need for their own internal systems.

Thinking Small

“Of the thousands of registered investment advisors, most are quite small and look like a small business with a few dozen employees and a couple of technical people. They need packaged solutions where all the integration has been figured out and incorporated into their portfolio management and trading systems by a vendor,” he said.

Small asset managers are an attractive target for SMA, a London-based SWIFT services consultancy that is developing a service bureau to provide message mapping and connectivity to SWIFT using Microsoft’s BizTalk. Managers with £2-4 billion under management don’t want to develop their own systems, or buy and manage applications, said Simon Murby, managing director at the company.

“BizTalk will bring on clients who can’t send a straight vanilla message that has to go to SWIFT,” he said.

Christian Antrobus, technical services manager at SMA, said managers often have information in custom systems. With the BizTalk solution that SMA will launch, those managers can output messages in proprietary formats, SMA will translate those for transmission over SWIFT, and pass back acknowledgements in whatever format the asset manager requires. The company expects to have a demo at Sibos.

The Free Route: The Internet

Although SWIFT is marketing its network as the solution for the connectivity that leads to straight-through processing, many market players are looking for the least expensive solution they can find, and for some that means using the Internet. Firms can use the message standards from FIX, SWIFT or ISITC over any network, and many do.

“There’s a lot of pressure to use FIX, and that’s because it is free, you don’t have to pay Omgeo,” said one vendor. “SunGard, Radianz, and TNS are doing a lot of FIX traffic, and that includes sending SWIFT or SWIFT-like messages.”

Clemens at Advent said he has been impressed at the rapid adoption of FIX by the buy side.

“Firms have learned to depend on it for cost savings and trading strategies. For buy-side firms, one of the nice things about FIX is that executing brokers who are hungry for the order flow will often pay for the cost of the FIX connection, and it’s very easy to adopt a free solution. We have rolled it out to half our Moxy OMS customers, and the reviews are very positive,” Clemens said.

OMS vendors figure that STP requires integration, and since they are sitting in the middle, they can extend their services to offer middleware and network connectivity to their customers. Since much of their order flow may go to Omgeo and through SWIFT, they are reluctant to criticize their costs on the record.

Connecting to counterparties is a complex task and many smaller asset managers don’t have the staff for it.

“For a $75 billion institutional money manager,” explained Quinlan, “what drives the difficulty is the number of custodians they have on the other side. He might have everything executed with one broker, but then he might allocate the 100,000 share trade across 300 accounts, and each account has its own custodian or multiple custodians.”

Clients are finding Omgeo cost-prohibitive for international transactions, said one OMS provider. European fund managers, and US managers who are running non-American investments, often rely on SWIFT for their international connectivity.

Taylor Bodman, a partner at BBH who is responsible for its Infomediary service, described getting a SWIFT or Radianz connection as similar to getting a dial tone on a phone line – it is just the first step to a conversation, a conversation that asset managers might have with custodians and broker/dealers. The first step costs something, but the larger and more significant investment is in addressing the issues that allow the two parties to understand one another electronically.

“Getting the dial tone is an expense that can be lowered for a lot of investment managers,” he said. It is a challenge for SWIFT to reach the 9,000 or so US investment managers directly. Yet all of them communicate transactions and other financial information in some form or another with their banks today. Bodman expects that a growing number of investment managers will link to counterparties through consolidators who can provide network connectivity and message transformation.

After Getting the Dial Tone

“Managers need to insure there is proper transformation and translation of data to get STP at their counterparty, and that is where the real expense lies,” said Bodman. But Bodman said that BBH’s approach is good for asset managers, and good for network providers such as SWIFT and Radianz, who pick up volumes without any incremental customer support. Only a quarter of the BBH's Infomediary clients were using SWIFT previously, he said.

“To get sizable volumes out of the investment management sector, it helps to take a relationship management, rather than a sales, approach. SWIFT's Commercial Division is primarily about sales,” he said.

Now, asset managers who were using SWIFT for trades are also using it for corporate actions, confirms, statements, and other message types.

“The real expense is integrating all the functionality for the message types of SWIFT into the underlying processing systems at the investment managers and the firms they deal with. BBH can do that and spread the expense over many clients. We have a total of 330 banks, transfer agents, prime brokers, and fund accountants that we communicate with on behalf of clients,” Bodman said.

Malcolm Pobjoy, director of strategic business development at Omgeo’s office in London, said that many securities firms are using other networks, including the Internet, to send trade information, often with SWIFT format messages.

“In the securities market, one of the challenges the industry faces is harnessing the masses. There is a huge number of players in the market who don’t have direct connectivity to the SWIFT network, so they have to use other mechanisms for trade and settlement information, whether proprietary direct links or perhaps Radianz. SWIFT is getting their share of the growth, but there is a bigger growth in the securities traffic than SWIFT is seeing.”

Hedge funds want low cost, so they will use the Internet while big investment managers will use leased lines, he added. In Europe, financial firms tend to be oriented toward SWIFT.

Radianz is also pursuing SWIFT business. Howard Edelstein, president and CEO of the company, said the network’s business grew 68 percent last year and is continuing on that trajectory. In a recent survey of users, 68 percent said they planned to send SWIFT messages over Radianz.

“That’s pretty amazing. Two years ago no one out there thought there was anything as reliable as SWIFT,” he said.