Wall Street automates £630bn securities lending operations

Ten top Wall Street firms have launched an XML-based messaging system designed to automate the process of borrowing and lending...

Ten top Wall Street firms have launched an XML-based messaging system designed to automate the process of borrowing and lending securities.

The technology, developed by EquiLend Holdings, which is jointly owned by the 10 firms, creates a global electronic hub for use in securities lending transactions.

The £25m system, which took a year to create, is aimed at dramatically reducing communications costs at brokerages and lending institutions that now use either manual processes or networks of multiple direct connections to systems at other companies.

EquiLend said the system was used for £7bn worth of transactions during its first two weeks of trial operations. On a daily basis, it said, the messaging hub offers more than £630bn worth of securities that are available to borrow.

EquiLend was formed in May last year by Merrill Lynch, Goldman Sachs, Lehman Brothers Holdings, UBS Warburg, JP Morgan Chase, Morgan Stanley Dean Witter, State Street, Barclays Global Investors Endowment Fund, Northern Trust and Bear, and Stearns.

The company's system was created for brokers who are looking to borrow stock certificates from other institutions. These loans are used for short-selling, which involves selling securities that aren't owned by the seller in anticipation of a drop in the stock's price after the initial sale takes place.

Until now, most securities lending transactions "have been done by phone and fax", and much of the reconciliation process is not automated, said Dirk Pruis, EquiLend's president.

In contrast, a broker tied into EquiLend's system can use a Web browser to view stocks that are available for borrowing and communicate with the lending institutions.

The system is based on the Securities Lending Markup Language, a proposed XML standard that EquiLend plans to post on its Web site after receiving regulatory approval from the US Securities and Exchange Commission.

The software is written in Java and runs on Sun Unix servers. Transaction data is aggregated in its main data centre in New Jersey and at a disaster recovery site in Houston.

In addition to the Sun servers, both data centres are outfitted with Oracle databases, EMC Symmetrix disk arrays and Brocade Fibre Channel storage switches.

Fritz McCormack, an analyst at Celent Communications, said he expects other brokerages to adopt EquiLend's system because of the industry leaders that are behind the technology.

What EquiLend's founders did "was look at industry processes and what caused the most pain", McCormack said. "It's a great example of how firms can automate different, and slightly more arcane, parts of their business."

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