Retail investors rarely teach institutions a lesson but with the likes of the consumer-friendly, online stockbroker Charles Schwab, it’s a case of the tail wagging the dog. Since the mid-1990s, individuals have happily traded over the internet, but it’s only recently that online trade order facilities for pension funds and institutional investors have emerged in the US.
Typically those benefiting from the new developments are lower-tech institutions with smaller turnovers and less resources to invest in proprietary software. Technically speaking, all institutions now need is a PC with which to place orders.
One of the latest to heed the retail example is the $830bn (e917bn) asset manager Barclays Global Investors, which in February launched Orders Online, a system enabling pension funds to place cash-based orders through the internet. Initially the scheme is available solely to US pension funds but BGI vows it will eventually be available worldwide.
This system allows pension plans to make cash-based orders for either the next available or any scheduled trade date. They are also able to trade units of funds in exchange for cash. Plan sponsors can access account information including fund performance and unit values and BGI says it will supply pension plans with what it calls end-to-end reporting where a plan sponsor can review any orders placed, check the status of those orders and monitor their settlement.
At the heart of the project is the desire to curtail the laborious task of placing orders. “One thing plan sponsors have in common is that they are extremely busy and any time we can provide them online capabilities, it cuts the amount of time in the process with the investment manager,” says Tom Taggart at BGI in San Francisco.
In the US, placing trades can be labour intensive. “Typically it could take days with faxes back and forth between the plan sponsor and the investment manager, getting the appropriate signatures and so forth. Now the process can take literally minutes,” he says.
BGI is providing two additional services including detailed reporting on the internet instead of the traditional hard copy reports. It is also launching an external website. One of the facilities is referred to as ‘global personalisation’ a system that memorises details about each client.
BGI already counts First Trust, the University of Minnesota Foundation and Pacific Gas & Electric Company as clients and, although the idea of web-based trading is novel, Taggart believes it’s set to pick up. “You’re going to see this being the preferred way of doing business on the plan sponsor level over time. I think you’re going to see more large asset managers start offering many more web capabilities for the sponsors,” he says.
Just a week after the BGI launch, Northern Trust unveiled Trade Input, a web-based system allowing institutional fund managers to enter trade instructions which are then transmitted electronically into the Northern Trust trade system. The system is targeted at those clients who send faxes or communicate manually – again typically those lower volume, lower tech mangers.
According to Kathy Dugan, head of the multinational product group at Northern Trust, the new scheme is aimed at achieving straight-through processing for its clients and fund managers. Offering an array of automated means of communicating helps managers to eliminate faxed instructions. “This reduces the risk of input errors, creates an audit trail, and speeds trade settlement,” she says. The last point is particularly important: “as settlement times get shorter so we need to get rid of this whole faxing process.”
Trade Input allows users to send equity, debt and asset-backed trade information over the web and users can access an interactive input screen that queries asset descriptions and broker information. There is an
additional function that validates the order and this should minimise entry errors flowing into Northern Trust’s trade system.
As it is aimed at the lower volume end of the market, Paul Jezek, product manager at Northern Trust, says about 10% of total trades will be booked via Trade Input but that this under-represents the percentage of overall clients that will use the system.
Demand for the service has been greater in Europe than in America and pension funds using internal managers have been particularly keen on the product. In some parts of Europe the levels of technology aren’t so high as elsewhere and the web solution as an alternative to installing yet more proprietary software is highly appealing. There is also a tendency in Europe to use a single custodian rather than
several and this approach suits those in this case.
BGI’s Taggart says the move by institutions to the web is scoffed at by some as being old hat – individuals have been doing it for years, after all. In reality, it is an institutional readjustment and an important one for those executing orders via fax.
“The institutional world had been behind the ball on a lot of things online but we are catching up and, at least in the US, you are seeing quite a trend,” says Taggart.

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