In the world of financial services, it can sometimes feel like the back office is a firm’s most neglected resource, forever given short shrift when it comes to investing in support to enhance trade processing capabilities. If a back-office is running relatively smoothly and no one is actively complaining, post-trade processing software often comes at the end of a long line of other software solutions integral to a firm’s operations.
High volume, volatile markets make post-trade processing even more critical
But, in today’s markets, with volatility on the rise and high-frequency algorithmic trading pushing volume ever higher, managing risk is more important than ever. Vital back-office functions like trade reconciliation are mission-critical and have become the foundation of the trade flow and information-gathering process. As evolving technologies have made it easier to place orders and manage portfolios, the reconciliation process has unfortunately become even more challenging than it was in the past.
Users need to quickly identify risks and exceptions in the trade process
When choosing post-trade processing solutions, risk mitigation is one of the most significant concerns. Users must be able to quickly identify risks and exceptions. Efficient reconciliation is vital as trade breaks pose multiple risks to a firm. When a trade fails to match, this represents a financial risk to a firm. Post-trade processing and reconciliation are significant concerns in due diligence, and investors pay considerable attention to the management of financial risk. Indeed, post-trade processing and matching are critical components in any due diligence process.
Failures in processing and reconciliation can also damage a firm’s reputation. For example, on days with exceptional trading volume or volatility, breaks can occur in clusters. If a firm demonstrates multiple breaks at the same time, brokers and counterparties may lose confidence in that firm’s ability to handle challenging market conditions. Moreover, breaks can cause follow-on problems in other post-trade processes, which increases operational risk.
Ease of implementation characterizes the best solutions
Traditionally, many firms have relied on in-house post-trade processing solutions that required extensive capital investment and dedicated staff to maintain the systems. Not to mention that outputs could be unwieldy, analytical capabilities sub-optimal, and employees could be forced to perform some functions manually or depend on complicated Excel spreadsheets. Today’s software-as-a-solution (Saas) options offer firms a vastly more efficient and cost-effective way to handle important back-office functions. Any chosen solution should be flexible and easy to onboard, taking only days or perhaps a few weeks rather than months. Additionally, it’s critical to make sure that any choice is compatible with a firm’s current technology stack.
Ease of use is also an important consideration
Fortunately, Theorem’s solution is already connected to many brokers, making it easy to add additional data to pre-existing feeds. Even better, Theorem is a no-code solution, meaning that it offers mapping capabilities to onboard data in any format without the need to deploy new code. We offer flexibility by allowing users to extract information in the format most suited to their needs, whether that be machine-readable output, human-readable output, break summaries with infographics, or via an alert function that sends a notification when something goes wrong.
Give post-trade processing the respect it deserves
While the temptation has always existed to channel firm capital into areas such as the highly visible front-office, investing in solutions that eliminate post-trade processing errors can offer value that extends across the firm. Advanced solutions like Theorem not only reduce a cornucopia of risks but offer analytics and client reporting solutions that can add significant value to any firm. Get in touch to learn more about how a Theorem solution can add value to your back office.
About the Author
Rebecca Baldridge, CFA, is an investment professional and financial writer with more than 20 years of experience in creating content and research for asset managers, investment banks, brokers and other financial services clients. She’s worked for some of the biggest names in the industry, including Merrill Lynch Asset Management, JP Morgan Asset Management, BNY Mellon and Franklin Templeton. Rebecca also spent 9 years as an analyst and director of equity research in Moscow, working for several Russian banks. In late 2019, she founded Quartet Communications, a boutique communications firm serving financial services clients. Her writing has been published in outlets including Pensions & Investments, MSNBC.com, Inc. magazine, and Investopedia.com. She holds a B.A. in Russian from Purdue University and an M.S. in Finance from the Krannert Graduate School of Management at Purdue.