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STP in Institutional Trading
— Step 1: the Orders
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Investment Managers
respond to market factors to determine an appropriate
mix in the portfolios they manage. Changing market
conditions dictate changing portfolio balances,
resulting in buy and sell orders to achieve that
balance. The orders are placed with brokers. Traders at
the brokerage manage the orders, which can be of
considerable size, attempting to fill the order without
causing a movement in the market price. This can take
time, even days, usually with multiple trades filling
against each large order. The broker alerts the
Investment Manager when the order is filled (this is
called a "notice of execution"). If agreed in advance,
the broker can notify the Investment Manager of fill
progress, either fill-by-fill, or at specific time
points (e.g., at the end of the day).
In Canada today, most of
this order routing between the Investment Manager and
the Broker is manual, accomplished by telephone,
occasionally backed up by e-mailed spreadsheets or
faxed instructions for complex order baskets. Brokers
have systems (often developed in-house) for managing
their institutional orders. These can submit orders to
exchanges or allow traders to report fills from an
inventory although the order management process and
fill reporting are frequently manual (many firms use
paper tickets to record these fills). Completed trades
are submitted to back office systems to update the book
of record.
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