By Bob Hills of the Bank’s Market Infrastructure Division.
An important aspect of electronic commerce is the potential for market participants to automate transaction processing fully, from the point of trade to final settlement. Such ‘straight-through processing’ could make wholesale financial markets more efficient, and lower the costs and risks that participants face. But it requires participants to use common message standards to exchange transaction data electronically. Several market-led initiatives to develop common standards have made substantial progress. But many trade messages are still sent by fax or using incompatible electronic networks, which means that different participants may have to re-input the same data manually at various points during the trade process. This article describes some of the initiatives to establish common standards. It then looks to economic theory to explain why market participants may find it difficult to co-ordinate to introduce a single standard, in spite of the wider benefits. It discusses how such technological changes may affect market structure. Finally, it considers whether some recent technologies, in particular eXtensible Markup Language (XML), may make it easier for market participants to adopt common standards.