For the past two decades, advances in computer and communications technologies have combined with regulatory change to alter the global financial system completely. This has been most striking in securities trading and complex financial derivatives, where technology has expanded existing markets, created new ones and accelerated the processes that enable the markets to function.

The ultimate goal is, of course, to create an electronic continuum where trading transactions take place automatically in "real time" and only exceptions require human intervention. This concept of straight- through processing (STP) aims to link all the activities involved in financial trading from the front office activities of gathering intelligence and data analysis, through orders and execution, to final settlement.

STP also promises to speed up the trading process and deliver two important benefits. The faster a transaction can be completed, the less financial risk is involved and the lower the processing costs for market operators and traders.

In the broader economy, the trend towards "electronic" commerce strives for the same goal for the same reasons. But, unlike other sectors, the financial markets have a deadline. The US Securities Industry Association (SIA) has set June 2005 as the date when all securities trades must be completed or "settled" by the end of the day following the trade - so-called T+1. Currently, the trading parties have three days to settle a transaction (T+3).

The SIA argues that, while the cost of the changeover is estimated at $8bn, savings of as much as $2.7bn a year will result from T+1. In addition, tighter regulations on risk management will be more easily met. The T+1 deadline only officially applies to US securities trading. But efforts to meet it will affect the whole global financial system. "All clearing and settlement of cross-border trades will have to meet T+1, so all trading venues will need to settle in a day. This will have a tremendous impact, even if you are not trading in the US," says Fred Meyer, chief strategy officer at US software developer Tibco.

"It is as big a change as the introduction of digital information feeds to the markets in the 1980s," he adds.

Widespread installation of STP is central to meeting the T+1 deadline. The numerous steps in a trading transaction must be linked electronically to enable it to be completed within a day. The fragmented infrastructure now in use, which can involve different systems on different computer platforms, is not efficient enough to cope.

Bob Gach, global managing partner for Accenture's

Capital Markets Industry practice, sees the T+1 deadline as a spur to adopt STP. "It's a big step which will require major infrastructural changes. It is always hard to get companies to do this. I see T+1 as a subset or a milestone on the road to STP - it will galvanise companies into action."

But Mr Gach also sees T+1 as a potential distraction from the important benefits that STP will bring, especially against a background of a shifting deadline. The original deadline was to have been this year, but was postponed until June 2004. However, following the terrorist attacks in the US on September 11, it was postponed further, until 2005.

Moving the deadline could make companies complacent about plans to install STP, says Mr Gach. "STP is primarily about driving down cost and driving out risk. But it is also a way that companies can enhance customer experience and it is tied-in with customer relationship management (CRM). Without STP, companies cannot accomplish CRM."

STP, he adds, is a "journey" rather than a destination. "STP began in the 1960s when the markets had to close on Wednesdays so they could catch up with the paper work. But we are at an important inflexion point. The next two or three years will see real progress."

Early signs of progress are evident. In the past two years, a host of "standards" groups has emerged to specify the technology needed to link systems together and market participants are laying their plans for straight-through processing. Paul Wilson, director of corporate marketing for Europe, Middle East and Africa at SunGard, the software developer, notes increased attendances at seminars and conferences on STP subjects.

"A recent seminar in London brought in 90 asset managers - and what intrigued me was how much people want to talk about STP," he says. "They have realised that, although they have a three-year lead up to T+1, they have to start thinking about it now." There is a powerful financial incentive, he adds.

"Interest is obviously heightened by the regulatory environment and T+1, but what is really driving STP is that it costs you less. It is more efficient and it saves you money. One of the main savings comes from better exception handling.

"Today, between 20 and 30 per cent of trades fail, mostly from predictable data entry errors. The cost of repairing the trade is enormous, so if you can catch it automatically, you can save a lot of money."

Interest in STP is, however, not universal. "The main desire for faster settlement and T+1 comes from the 'sell-side' and the custodians because they can cut their costs," explains Jonathan Clark, director of business development at London-based Citisoft Investment Management Consultants. "The 'buy-side' might be able to cut costs as well because trades will be priced lower, but they have to offset their investment in back office systems. The larger fund managers have invested heavily in their own post execution and settlement systems and they have no incentive to rip these out and replace them with new systems."

Tony Kirby, director of the STP programme at Reuters, sees the main impetus for companies to move to STP coming from building a strong business case first, rather than the T+1 deadline.

Companies cannot afford to rip out expensive back office infrastructure, he says. "They need to look at ways they can expand their transaction processing technologies with workflow components. At Reuters we are concentrating on building bridges between the front office functions and transaction processing and then combine that with workflow."

The upheaval in the financial markets caused by advancing technology and regulatory change looks set to continue. Assuming the T+1 deadline is met, some already talk of T+0 - that is, immediate settlement - which will place even greater demands on IT systems. At the same time, the cost-savings and performance improvements promised by STP will drive the financial sector to automate as much of the trading process as possible. This will not only create more efficient, lower-cost trading conditions, but will also provide valuable lessons for other sectors which do not have the pressure of a deadline.