How Straight-Through Processing Can Maximize Portfolio Value
Straight-through processing, or STP, is a function every online brokerage firm should provide to their customers. STP has long been a standard feature with various financial institutions including banks, credit unions and brokerage firms. Basically, the faster your order is placed, the more likely you are to capitalize on the full profitability available. Because the financial marketplace is so competitive, brokers, bankers and consultants who use STP to process customer requests have a competitive edge.
STP is a newer type of transaction system that eliminates steps required in the past to process any financial transaction. Before, trade orders were received, entered electronically and then entered manually one or more times before the order was passed along for processing. The traditional process encompassed four steps: front, middle and back office processing as well as general ledger entry. With the advent of STP, however, the process was streamlined into one step using electronic-only entry methods.
There are many advantages to STP, but the primary is twofold. First, because the extra manual entry steps are eliminated, a certain margin of human error is eliminated as well. This means that orders placed via STP are more accurate. Second, the settlement risk per transaction is reduced because orders are processed faster with STP. The risk of the market itself intervening on a request before it is processed is greatly minimalized with STP.For instance, if you finish your stock market analysis and decide to request a trade, you are more likely to get your desired pricing for that trade when your request is submitted via STP processing.
It is critical to ensure that the financial institution(s) you work with offer STP processing. There are several ways to verify this. For example, if you are researching which online investment firm to register with, look for a time-placement guarantee (this is the maximum amount of time it takes from when you place your request to when it is processed). Companies that operate without STP functionality areusually reluctant to offer a time-placement guarantee because the order information may have to be re-entered manually one or more times during the processing phase. The order may have to be adjusted for human error as well. However, companies with STP functionality confidently offer low-time placement guarantees — someguarantees are even as low as one second. The guarantee should also include a waiver of brokerage fees if, for some reason,the processing time extends beyond the posted guaranteed time.
STP and Portfolio Value
Straight-through processing can enhance your portfolio value in a number of ways. The following represent the three main benefits STP can offer your portfolio:
- Increase in profits. The faster your transaction requests are processed, the greater the likelihood your original profitability projections are met with each trade you make. This enhances the value of your overall portfolio as well as stabilizes it over time.
- Decrease in errors. Because each of the manual data-entry points has been eliminated with STP processing, this means (outside of any errors you may submit in your original order) you will not have to adjust your portfolio for human error.
- Decrease in administrative fees. When you make a trade and processing gets delayed, you may need to make additional adjustments to your portfolio to compensate for a lower profitability than your original order. Each time you make an adjustment to your portfolio, you can expect your portfolio administrative costs to increase. The faster your trades are processed, the fewer adjustments you have to submit and the lower the firm’s administrative overhead is— costs that are passed to you in the form of transaction fees.
By increasing profits as well as decreasing errors, fees and administrative costs for managing your portfolio, STP processing maximizes your portfolio’s value over the long-term.
About the Author: Samantha Carlisle is an IT professional who specializes in STP technology for banks, brokerage firms and online brokerage houses.