Software Vendor Unveils Novel Approach to Trade Automation
Simon Boughey
CreditFlux, Jan 2007
A start-up company has created a new way of automating processing of credit derivative trades which it believes could dramatically reduce operational risks in the business. Hattrick, a two-year-old software company based in London, has launched a product called ClearGate, which is designed to allow full automation of all aspects of a credit derivative trading, including tasks that are currently carried out manually such as novations, allocations, increases, partial terminations, full terminations and corrections.
Hattrick's Chief Executive, Michael Paull, believes the credit derivatives industry has been too quick to pat itself on the back lately after its efforts to automate trading. The banks claim that 70% of DTCC confirmations are now automated, but Paull says that this figure relates only to a small part of a trades life cycle. Only the top of the trade is automated, he says. Everything else is manual.
Moreover, the successes in the automation of trade affirmation and confirmation apply only to the top 10-15 dealers. Yet there are 650 credit derivative market participants, most of whom have made much less progress in automation, he points out.
Lack of automation is costing the industry plenty of money. Paull has calculated that the 30% of trades that are still processed entirely manually take about two hours to complete, equivalent to around $250 per trade, or around $100 million a year for the industry as a whole.
There is also the cost of failed transactions to take into account. His research has revealed that around 17% of all trades fail to be executed correctly and have to be rebooked. That could be costing the industry a further $500 million a year.
The credit derivatives industry is difficult to automate fully given the complexity of trades and the number of separate actions that occur. Communication through different systems at so many different institutions has also proved a problem. And, of course, updating systems is hugely expensive and difficult. Hattrick's answer, ClearGate, uses the new language called Web Services Choreography Description Language (WS-CDL) developed by WC3 - the World Wide Web Consortium. This enables highly complex long-lived processes to be automated over widely distributed systems without introducing a centralised point of control, says Paull.
To eradicate the traditional problems of communication through distributed systems, such as lock, loop and race conditions, Hattrick introduces an automated checking capability that protects against these conditions and continuously monitors the message exchanges to make sure there are no unintended sequences, he adds.
Hattrick has received support from two major credit derivatives banks and has worked closely with them in the development stages. It is currently in discussions with a leading hardware vendor and the final product should be available for sale in June of this year.
