Eliminating trade breaks is the key to shortening the U.S.’s settlement cycle to T+1 within the next two years, according to Terrence Cheung, VP of Product Management at LiquidityBook.
Trade breaks occur in the back office when there is a disagreement between the buy-side firm and its sell-side counter-party, he said, adding that these disagreements can be numeric in nature.
“For example, price, gross amount, commission or fees can be inconsistent because of how different systems perform rounding in their calculations,” Cheung told Traders Magazine.
Trade breaks can also occur because of miscommunication, he said.
“For example, if the buy-side firm changed its settlement instruction, and the sell-side firm didn’t update its system, catching this discrepancy intraday will prevent trade breaks in the back office several days later,” Cheung explained.
The reduction of the number of trade breaks reduces the need for human intervention after trading is complete, according to Cheung.
LBX Trade Match, a new product from LiquidityBook, offers FIX allocations, confirmations and trade affirmations, enabling clients to leverage the network services they already use and eliminate trade breaks via a single solution.
“LBX Trade Match will enable our buy-side clients to send allocation instructions to their sell-side brokers over FIX and process their sell-side brokers’ FIX trade confirmations,” Cheung said.
He added that DTCC recently retired its OASYS platform, which serviced a large percentage of the U.S. equities market.
Due to this, the buy-side now either must switch over to DTCC CTM or seek a FIX-based solution for post-trade communication.
“This spurred us to build new functionalities for managing trade allocations and confirmation affirmations integrated with our flagship LBX Buy Side product, eliminating the need for a third-party system,” he said.
The new offering enables the buy-side and the sell-side to communicate post-trade information efficiently and effectively while adhering to the latest industry standards and best practices, Cheung said.
“Instead of performing tedious manual tasks or leveraging multiple vendors, firms can perform streamlined processes via the same platform they are already leveraging for order and execution management,” he said.
After trading is complete, buy-side firms send allocation instructions to the sell-side to break the trade down to sub-accounts, according to Cheung. This communication can happen over email or chat, which requires the sell-side users to manually enter the breakdown into their system.
“This process can also happen electronically, such as via FIX. These electronic methods allow the automation of many workflows, helping the sell-side to achieve straight-through processing,” he said.
After the allocation process, the sell-side is responsible for sending confirmations to the buy-side firms.
For U.S. buy-side firms, the official SEC Rule 10b-10-compliant confirmation document is generated and sent by the sell side’s back office at the end of the day.
However, some buy-side firms want unofficial confirmations electronically intra-day to get a head start on catching post-trade errors.
Unlike documents, electronic confirmations also allow the buy-side to perform data analysis on this process.
“For example, firms can use it to measure how quickly a sell-side counter-party can send back confirms and how often they result in errors. The buy-side may then use this metric to determine how much order flow a sell-side counter-party will receive in the future,” Cheung said.
The new trade settlement solution meets the needs of both the buy and sell sides and is cost-efficient.
Cheung said that other solutions for electronic allocation and confirmation charge on a per message basis, whereas their charge model is a flat fee per connection model.
“In addition, having a single point of access reduces the cost of managing multiple vendors,” he said.
The new product comes at a pivotal time for LiquidityBook, which earlier this year received a minority investment from Primus Capital to help accelerate its growth and further scale the business.
“This has been a very exciting year for us. We unveiled a refreshed brand just last month,” said Cheung.
The firm has also made a push to serve its sell-side client base, making several key hires over the past six months, including Sayant Chatterjee as Chief Operating Officer, Stephanie Minister as Managing Director of Connectivity Services and Frank Kost as Head of Sell-Side Business Development, North America.
“Looking ahead, we will continue this growth trajectory by expanding geographically, lending our voice to industry issues and adding to our already robust product suite, including through new functionalities like LBX Trade Match,” Cheung commented.
