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Case study for Torstone Technology




Settlement hots up at Peel Hunt with Inferno

FTSE 100 market maker and full-service broker Peel Hunt reveals how Tortstone Technology's Inferno solution for high volume securities and derivatives processing supports their competitiveness and agility in the market.Steven-Fine

Back in 2007 full-service broking and advisory house Peel Hunt, known for its coverage of the mid- and small-cap sector added FTSE 100 market making to its range of services and soon realised that the firm could become a credible competitor in the sector. It also became clear that they could take a larger share of the market with the right systems in place in both the front and back office. This kicked off two projects resulting in the selection of a highly scalable, data feed-driven trading platform at the front end and a shift away from external brokerage services by insourcing Inferno from Torstone Technology and taking control of back office settlement, accounting and reconciliations in-house. Today Peel Hunt is regularly ranked as a top market maker – facilitating market liquidity in over 2,000 traded stocks – with activities accounting for over 4% of all trading on the London Stock Exchange.

Peel Hunt makes a long-term commitment to clients with a 'joined-up' approach offering expertise in corporate, research, sales, sales trading, fixed income and market making, which distinguishes the firm from the competition.

Steven Fine, managing partner and head of trading & sales believes that a key differentiator is the "size and scale of the trading platform." The firm derives its revenues from its fee-driven service for corporate clients (Peel Hunt ranked 2nd overall in Corporate Broking in the Thomson Reuters Extel survey June 2011); agency-driven institutional commissions from buying and selling shares – both of which have been challenging for all market participants in recent years – and the growing retail investor market of private clients, wealth managers, IFAs and other gatekeepers.

"We provide a full suite of execution services for all UK market participants," Fine explained. "To retain our competitiveness we need a highly sophisticated, well-developed front-end engine for pricing to win business. Equally we need a highly sophisticated, efficient and scalable back office processing engine to cope with high volume, high frequency reconciliations and settlement processing. Back office operations and settlement tend only to matter to traders if they go wrong. You need both systems to succeed and to support every element of the service we provide to corporate, institutional and retail clients – get any element wrong and you may put your business in jeopardy."

Peel Hunt had relied on first Pershing and then Penson for securities processing services. The specialism in the stocks of small and mid-cap firms meant settlement costs were relatively low overallas volumes are lower and liquidity less than when trading FTSE 100 shares. The premium rate per transaction charged for the higher volumes and smaller margins was revealed as untenable by the FTSE 100 pilot and added urgency to the review of settlement systems. Peel Hunt was also unhappy with the service. Fine recalled: "The in-house settlement team we needed for resolving failed trades and reconciling business was significantly larger with Penson than it is now with Inferno, and that's including the subsequent addition of new strategies and around an eightfold increase in volumes."

By the end of 2007 Peel Hunt decided to extricate itself from Penson and use Inferno instead, which had been developed in-house by KBC, who owned Peel Hunt prior to the broker's independence in 2010. Inferno had been developed to provide a single platform to support middle office, back office settlement and accounting processes for a wide range of asset classes including complex derivatives, fixed income and high volume equity products. Peel Hunt opted to insource the service to have full access to Inferno's functionality in house, while paying on a per transaction basis. The system took three months to implement at the end of 2007.

In 2011 the team that develop and support Inferno, which today has clients and offices in London, Hong Kong and New York, also became independent with the management buy-out and employee-ownership of newly formed Torstone Technology.Peel Hunt has announced that it is renewing its commitment to Inferno and has signed a five year contract with the new owners. The firm took the opportunity to review other securities processing software and services available to them before doing so, with Broadridge's Gloss system coming in second.

The decision to remain with Inferno was also made against some key trends in the market which Aaqib Mirza, Peel Hunt's head of technology explained: " As well as becoming more efficient because of the small margins and higher volumes of FTSE trading we also need systems to handle increasing market fragmentation and competitiveness from the growth in internet dealing, on-line brokers and the impact of the Retail Distribution Review (RDR) which will abolish trail commission on retail investments by IFAs, for example. Increased retail activity and regulatory changes are driving the market to greater transparency of fees and a cheaper execution methodology which all leads to Peel Hunt needing to be very competitive and highly responsive to change."

Stephen Hall, head of operations at Peel Hunt outlined the key reasons behind the decision to stay with Inferno: "First is scalability – we haven't found a way of breaking Inferno yet, despite trying. One day we peaked at 62,5 00 trades with Inferno quietly coping and no alarm bells ringing. That's impressive. Usually we are processing around 30,000 trades per day. Another main advantage of using Inferno compared with any other system that we have come across, is the flexibility of the code itself. Changes can happen within minutes. In our business you often have to make changes, but with other vendors you may have to wait months for the next code release as they only make two or three releases in a year. This could mean that you have to stop doing a certain type of business for months on end. Whereas with Torstone we request a change; they just do it, often within minutes."

Brian Collings CEO of Torstone Technology said: "We literally release daily, which is a real break with the past."

"The level of service from Torstone is also important," said Hall. "Whoever is on call will fix any problem and make any changes which speaks volumes about the people as well as the software platform. Other vendors in the market face the problem of moving their old systems onto a more modern platform or continuing to build on top of a 20 year old architecture."

The bulk of Inferno was developed five years ago by people acutely aware of the need to simplify back office operations by standardising on a single platform for multiple instruments and geographic markets; and by accountants who understood the financial, risk and compliance impact of trading decisions.

Hall continued: "Inferno has a lot of modules within the same overall system whereas with many other providers you need different solutions for different asset classes and you know that there is a lot of linking going on in the background which means there is a greater potential for things to go wrong. Reconciliation is the most obvious. With Inferno reconciliation is all part of the same system which enables us to navigate from one asset class or business area seamlessly, saving a lot of time. If you have a good front to back STP system then most of the work of operations should be reconciliations. With Inferno you can click on something and it will automatically jump to the other area within the system where the break in the settlement has occurred. All the reconciliation information you need is in front of you and it is easy to access the whole story on a trade."

Operational benefits
Peel Hunt has eight people on the settlement desk, two on trade support and another two focused on compliance and static data set up. They attain high levels of straight through processing (STP) as Hall confirmed: "The rate is more than 99 per cent and very near to 100 per cent. If trades don't go STP there's something wrong in the static data or the trade itself, and we immediately see a report telling us that the trade will not go through and the reason why."

As soon as a trade is booked into the front end system – which is Fidessa – it is immediately pulled into Inferno. Operations staff know within seconds if there is an issue and this happens at various stages throughout the life cycle of the transaction. "We can deal with things that go wrong immediately," said Hall, "rather than finding out about problems days later. They are usually fixed before anyone else knows about it."

Another feature of Inferno well-liked by the operations team is the way that unfixed trades never get lost. "Anything not fixed will remain on screen whereas some systems will relegate yesterday's unfixed trades to another screen which is," as Hall described, "no use to man or beast.It's very important that we don't lose sight of yesterday's problems. Inferno reconciliations show cumulative problems – not just the daily report."

Inferno is a transaction processing engine and also provides a fully featured and granular trade accounting system with facilities to drill down into the detail. "It is easy to reconcile the accounts and we also have the ability to run what if? style reports retrospectively," added Hall.

Asset to the front office
He also believes that the system is an asset to the front office: "Many, many clients judge you on the time it takes to send the confirmation. If you don't support the best execution trading activity with efficient information to customers, they can walk way so easily as they'll all have other arrangements with other brokers. With Inferno we are able to service client assets well and in an immediate and accurate fashion making sure that we are not in breach of FSA regulations and auditing requirements. Inferno lets us focus on what we need to do and keeps us in control.

"You can trade all you like, but if you mess up in the back office you won't be trading for long. The only way we get the trade is because we offer the best price. If brokers see any negative – business goes elsewhere. Torstone's ability to respond the same day to our requests for small changes and tweaks is also beneficial. A recent example is where I needed to change something in response to a broker's request and Torstone responded same day. That helps us to keep the business. In some cases the broker's demands may have been testing the waters with us and if we respond well a small amount of business can suddenly explode.

"If asked I'd say Torstone's Inferno is by far and away the best system out there – and I've been looking for 20 years!"

Business benefits
Steven Fine summarised the benefits from his perspective: "Inferno enables us to trade a wide variety of assets classes, including corporate bonds, PIBs, ETFs as well as shares and because of the flexibility and quality of the Torstone team supports our need to implement changes quickly. It helps to provide our edge in the market by settling and processing high volumes of trades at an acceptably low cost. It also provides the information we need to budget and plan sensibly and examine the impact and cost of new trading strategies, quickly. Finally we like the people and enjoy a good relationship with them."




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