Adam: Could you tell us about the work you do at American Century Investments and how you've been automating operations there.
Scott: I'm responsible for the technology side of our front office and middle office system. We have a proprietary order management system, so I'm responsible for what our portfolio managers use, for what our traders use, and then, after the execution of the trade, for the receipt, processing and delivery of the trade's post-trade activity. Not only to the brokers, but downstream to our accounting systems, to our custodians, into settlement; then the data that comes back from those entities.
Adam: I'll kick off with a broad question. What from your point of view are some of the key learning issues to be had on the post-trade side?
Scott: One of the key areas for us and several buy side firms is what I call the post-trade pre-settlement space. You know, we've automated the delivery of the order; we've been doing that for decades, now. And when we send an order to a broker, where we have multiple accounts, we're giving them a block. At the end of the day, when we're booking out the trade, we need to tell the broker which accounts and what the allocations are for those accounts. But the broker has to take each of those allocated accounts and they have to provide us back an official confirmation message for each account. That confirmation message has the financials spelled out in it, the fees, the charges, taxes, net money. It also has settlement information, settlement details, to form the official record of the trade. As the buy side, we need to archive and have available those confirms. We need to take that confirm and make sure that it matches up with our understanding and our recognition of the trade.
So we do a local match on that, and if that matches then we have to affirm the trade back. A lot of firms have been using FIX allocation messages to do the first part of that, delivering the FIX allocation. In fact, American Century was the first buy-side firm to use the FIX allocation message. We started using that in 1997. But it's only been this past year that firms have really been able to use the confirmation messaging part. So prior to that, confirmation either took place directly from the broker, PDFs that are attached to emails, or faxes that are delivered -- the paper route if you will, even if it's electronic paper. Or some were leveraging other services that are out there; there are vendors in that space to do that. For American Century, we never used any other services. On the non-US side, we were taking those non-US confirms directly from the brokers and then having someone in our middle office area look at our screen and their PDF to compare the numbers and, if they matched, hit a button. Then that initiated the rest of the booking and released it to all the downstream systems for post-trade processing. Then there are other buy-side firms that leveraged some vendor solutions that were out there. One of the vendor solutions was migrating all of the buy-side firms from an older system to a newer system, and created a deadline. So several of the buy-side firms have gotten together over a number of years, asking, 'Hey, could we automate the confirmation space?' There are different motivating factors for all of this, but the good thing is that we sort of all came together at the same time. We had maybe a dozen buy-side firms that really worked with the brokers and worked through what the process flow was. We agreed to it, and also how the messages should be constructed and populated.
Adam: This was all under the auspices of FIX?
Scott: The FIX Buyside Working Group, yes. The real advantage is that, by coming together, we were able to establish a solution that not only worked for our respective firms, but also was consistent, as much as possible, with what other buy-side firms would want, which makes it simpler for the sell-side firms that need to implement that support, and frankly means there's less friction for being able to do the implementation. So by coming together and working through that, and hashing through those things, but also by having some deadlines that were setting target dates in the sand, it created the proper timing of the event. Several buy side firms have implemented this capability. Capital Group was the first to go live. We went live a couple weeks after them. BlackRock has implemented it; GMO has. The key thing for us, and this again focuses on non US equities, is we have asked all of our global brokers to support it. We have approximately 20 brokers that support this. The key measuring stick for us is, of all the confirms that we have, what percentage of those have we now moved to this automated matching solution. For American Century, we've had over 75% of our flow in the last four months.
Adam: Is the goal 100%?
Scott: It is, but what you have to do is look at your broker list. For instance, I know that in the press Capital was cited with 60% or 65%with their top 15 brokers. So there's a really heavy concentration in terms of trading volume relative to the number of brokers a buy-side firm deals with, and some of the firms that are not part of the "100%" may not represent a lot of flow. It may take a bit of time. From a priority perspective we really focus on the core of our business, but we've opened the floodgates; we've asked all of the brokers. We've asked the brokers that we don't routinely do a lot of business with, to support it as well. There are some key things for being able to tap into your third tier of broker volume, and a lot of that involves the vendors. Some of those sell side firms use vendors' booking systems. For instance, the latest version of Fidessa CTAC supports FIX confirms. I have about a dozen brokers that use Fidessa. As those firms are being upgraded this year, they can just turn that on and it works through the hub. Then there are other vendors in the space. Alpha Omega has a solution for the buy-side and the sell side. I have a number of firms that use Traiana to integrate. The key message I try to say is, if you're a buy-side firm thinking about trying to implement this flow, you can be successful, because all the major sell-side firms support this. And because they've already implemented this, they're eager to use and provide that for other buy-side firms.
Adam: In terms of the benefits, obviously cost and accuracy are big ones. Can you quantify the benefits in your case?
Scott: I don't know if I have an exact number in cost. What I would say is that for the group overall, the key initial driver was risk. There were some real concerns around having 100% dependency upon a central service provider to perform the function that they were performing. That provider had several outages over a period of time, and that got people really concerned. The other thing is that all of us already have FIX connectivity to our brokers for all the order flow, so being able to add and finish the rest of the process using FIX really doesn't add a lot of cost. There's a build out -- an implementation cost -- but on the normal day-to-day operations, it doesn't really make things any more costly or complicated.
Adam: When I spoke about cost, I was thinking in terms of savings from the manual process.
Scott: Yes, absolutely. Huge savings for that.
Adam: Could you quantify that?
Scott: I would just say that the person responsible for that is spending75% less time working on it. What happens is if there are any exceptions, those are quickly and easily identified, and you definitely make the whole process very much exception-based. We run with really tight tolerances, like 99 US cents, so we're able to identify some discrepancies that might have been swept under the rug before, or have matched within a wider tolerance band. Then we're able to tighten up the process, and that might be adjusting a fee rate, or it might be making sure that 1 GBP PTM levy is being applied. Certainly for us, it's efficiency and accuracy, and it also provides a clear audit trail. If we're conducting an audit, or having regulators ask, 'Where's the confirm for this trade from last year in April?', we can easily bring that up. It definitely has improved the overall process.
Adam: You mentioned that this is being employed in terms of all non-US securities. What is the status in terms of the US? Is that already completely automated?
Scott: The US is special because you have DTC. All of the confirms and affirms effectively today go through DTC. Once you've affirmed the trade, the next step in DTC is initiating the settlement side of it. For US securities, brokers send their confirms to DTC, we get the confirms, and we have to affirm them. There are different models and different ways that you can do that, but by and large that's the way that it works. After we implemented FIX confirms, in the first half of last year, we went through and leveraged the same internal infrastructure that we built out, and upgraded our interface to DTC. We now have a direct connection to DTC, where we receive the brokers' confirms via MQSeries messaging over those links. Basically what we do is, we bring the DTC confirms in, transform them and they look like the FIX confirms to us. We bring them into our system, we do the same local matching, they show up on the same dashboards, the same types of exception processes. Then, when we're matched and affirmed it, instead of sending a FIX affirmation message, we create a DTC affirmation message and send it over the MQ link. It's real-time as well. For us, it looks and works the same way. We're 100%, obviously there, because everything has to go through DTC.
Automated post-trade using FIX 4.4 Confirm / Affirm messaging
Adam: You mentioned that you've got a proprietary OMS. Why did you choose that route rather than a vendor?
Scott: We've had a proprietary OMS effectively since the beginning of the firm. We've just extended and implemented it. I've been with the firm for almost 20 years now. We had a proprietary OMS for 10 years before that. It's very tailored to our business; it works really well.
Adam: So there's never any incentive to go to a vendor.
Scott: Obviously, we have to benchmark. We compare and look at things, but our user satisfaction's been really high with our OMS. And we haven't found commercial-type solutions that match up as well.
Adam: Last question: looking ahead, what are the priorities for you now? It sounds like you've done the heavy lifting.
Scott: As far as the post trade side, my priority is to get the rest of my brokers on (the new system). Part of getting that is encouraging my buy side brethren to adopt this as well. The more of my competitors that implement the same kind of solution, the more it helps us all.
Adam: You want the momentum. What kind of feedback are you getting from your buy side brethren?
Scott: Initially, they were large buy-side firms with mostly prop OMSs -- you know, Capital, BlackRock and us, for instance -- so it was pretty straightforward for us to be able to implement that and make that happen. I think the key thing for extending support for the buy side is going to be making sure that the support for the various vendor systems that buy-side firms use have this capability and are enabled. I know that the Longview OMS users have an option to be able to implement this, but there are a number of other buy-side firms, buy-side OMS vendors that haven't actually gotten on board. There are huge cost savings, especially for firms that are already using some vendor solution. For us, we were looking at possibly using a vendor central matching solution, which was going to be a significant increase in our costs, and add some complexity, too. We felt like we would be able to make that happen a little bit cleaner, so we were able to, to avoid those costs and increase our efficiency. For most of the buy side firms to be able to use and benefit from this, they need their vendor systems to support it.
Adam: How big a factor has FIX's involvement been for getting this done?
Scott: FIX provides the forum. Buy-side and sell-side firms, the vendors, they're able to work together around a common goal. That's how we got to where we are now. I think that the key thing that the FIX organisation is doing, and will continue to do, is being able to provide forums to communicate the message, answer questions that people have and encourage adoption.