April 19, 2011 – One instrument. One ID. One universal code.
Does the securities industry need something akin to the bar codes that now are inseparable from any consumer product sold at retail or online, worldwide?
"I said, you guys have this solved,’’ Bernie Hogan remembers having said, when first confronted last year with the proposal that a universal identification code might be needed in financial markets, worldwide.
“I can't imagine that something as valuable as securities doesn't have this.,’’ said the chief technology officer of the United States operations of GS1, the official provider of bar codes worldwide and pioneer of entity and instrument codes in industries such as retailing, manufacturing and health care. “The more I understood, I was kind of shocked.”
Because that is not the case with securities. It’s not the only problem that makes it difficult for operations departments to support trading desks that are pursuing increasingly complex trading strategies that span not just stocks, bonds, futures, options and other types of securities, but nations and continents, at the same time. There are also complications in clearing trades across many markets and making efficient use of collateral, aka margin. But the starting point for removing operational errors is to make it clear just what instrument is actually being traded, at any time, any where.
GS1 is just one organization that has thrown its hat into the ring to create and distribute identifiers, for instance, that meet the requirements of the U.S. Office of Financial Research. The OFR”s aim? Reduce systemic risk in the U.S. financial industry.
Others in the running include the Depository Trust & Clearing Corp., Standard & Poor’s CUSIP Global Services, Dun and Bradstreet and the Association of National Numbering Agencies.
The GS1 approach involves two components: a prefix that indicates which company has issued the financial instrument and then a specific identifier for each instrument that has been issued.
The aim is to bring what Hogan calls the kind of “backwards and forward visibility” to the securities industry that manufacturers, distributors and sellers of retail goods like Smucker’s jelly already enjoy.
Smucker’s (or Pepsi or Procter & Gamble) can at any time see what it is selling through what distribution channel because all their “demand-side partners” are using the same ID code system.
But that is not the case in securities. Bloomberg, Reuters, Interactive Data all have their own codes. And even if they “open up” their codes to public usage, for free, as Bloomberg has done, that won’t mean universal adoption of a single system of identification.
If you are running a worldwide trading desk in search of buyers or sellers in every corner of the world, you’re going to have a hard time finding them, in a single universal manner, says Robin Strong, Director of Buy-side Market Strategy, at Fidessa Group, a supplier of trading systems.
That is “primarily because the parties involved at the end of the various bits of wire from a single buy-side dealing desk don’t tend to cooperate. They’re all competitors. They want to won their piece of the value chain,’’ whether it’s a coding system or an order management system. “They’ve built a market that they own” and want to protect, he said.
This will have to end. But unclear is how U.S. Office of Financial Research and systemic risk watchguards will make their pick.
And ... whether that will jibe with what the rest of the world wants.
Because the coding system “has to be global, otherwise it’s pointless,’’ said Tony Freeman, director of industry relations in Europe for Omgeo, the post-trade operations firm jointly owned by the Depository Trust & Clearing Corporation and Thomson Reuters.
This column originally appeared on Securities Technology Monitor.
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