XML could cut financial trading costs

Automating transaction processing using XML (eXtensible Markup Language) could lower costs for financial markets, according to research by the Bank of England.

In its Quarterly Bulletin, which is published on Wednesday, the bank said the impact of XML could be "considerable" in pushing forward technological progress because it lowers companies' costs of switching towards automated processing and furthers the wider adoption of electronic commerce.

Financial institutions frequently have to re-input data as it passes between incompatible systems, which introduces errors that result in failed trades and increased costs, said the bank. Automating these actions is one way to reduce human error while reducing settlement cycles for securities transactions, the bank added.

The report said recent research has shown that as many as two out of three security trades need to be amended, repaired or cancelled.

"This [processing] automation is expected to bring significant efficiency gains, as well as a reduction in costs and risks," said Bob Hills, of the bank's market infrastructure division, who wrote a section of the bulletin on the future of ecommerce for financial markets.

"It remains the case that too many trades in today's financial markets are still processed using fax or incompatible electronic networks," he added.

However, automation of these processes requires the adoption of common and compatible messaging standards, said Hills, suggesting that XML is the mechanism to kick-start this process.

One of the main benefits of XML is that it is backwards compatible, which would reduce migration costs from older systems.

However, the report concludes that the move away from outdated methods and incompatible networks hinges on the interoperability of XML-based standards.

Keith Gold, marketing director for financial services at IBM, said: "Standards enable more effective inter-agency transfers and the equities market, in particular, needs standards. XML is a format but not a complete standard - you need standards in the use of XML, and these are likely to come from the financial industry itself."