CAI Technology Group Preparing to Release Enterprise-Wide Buy-Side Compliance System

CAI Technology Group, a buy-side technology consultancy and systems provider, is gearing up to release by the end of this year a compliance system that checks trading activity across the entire firm. Placed in the middle of a money management firm’s trading process, the system, named ESTAC (Enterprise-Wide Stand-Alone Compliance), checks trading information from all portfolio managers simultaneously before trades are routed onto the respective trading desks. ESTAC is set to be released by the end of the year.

Fredda Ackerman, president and CEO, formed CAI last year in order to fill what she says is a gaping hole in the compliance process On the one hand, post-trade compliance systems don’t catch mistakes until after the trades have settled, and, on the other, pre-trade systems are affixed to particular trade order management systems on particular trading desks within the firm.

"The post-trade systems don’t solve any problem because you still have to go back into the market to break a trade, and then you have possible problems with publicity, fines and censure," Ackerman explains.
"The pre-trade compliance systems are linked to a specific trading system. None of them work with anybody else. So, what you have at the end of the day is your compliance being checked on your equity desk, being checked on your fixed-income desk, being checked on your derivatives desk."

Ackerman says traders don’t want to waste their time with unnecessary tasks. As it is, the trader has to react quickly, and a heavy compliance system that is tacked onto their trading system only adds more time. "Typically, traders have some broker rules that need to be checked and sometimes exchange rules, but they are very trade-specific," she points out. "A majority of the compliance should be done very early, before the trader gets it. That’s way too late to be looking at enterprise-wide rules, and you’re slowing down the trader."

Ackerman explains that even with the most complex pre-trade compliance systems, all the data accrued throughout the day on each trading desk must be rechecked at a single place, and until now, this has been accomplished manually at the end of each day. In a global environment, where firms might have offices around the world, there is no "end of day," Ackerman explains. ESTAC, she says, is a 23-and-a-half-by-7 product, as opposed to 24-by-7, because the system will take a half an hour to complete processing.

The system, though, does operate in real time, with trades coming in from the various portfolio managers, being checked by one of the many engines within the system and then parceled out to the appropriate place. If trade data passes muster, it is sent along to the trading desk. If it is flagged, the organization has the ability to predefine where it is sent to: a compliance officer, back to the portfolio manager or the portfolio manager’s assistant.

Interestingly, ESTAC will proffer possible scenarios that will remedy whatever the particular trade problem is. If a portfolio manager sends down an order for 100,000 shares of GM, but that bumps the portfolio’s weighting in automotive stocks above the defined limit, ESTAC will suggest that today is a good day to dump some of your DaimlerChrysler. "It gives you a proposed solution," Ackerman says. "It’s an assistant in the decision-making process."

By Andrew Rafalaf