James Karat and The Invention of Straight Through Processing - "The Most Famous Person You'll Will Ever Meet… That You've Never Heard Of"
Background:
I was born in 1975. I wasn’t a clever student – in fact, I was terrible. I struggled and felt that the teachers never really liked me and never gave me any encouragement or help. I was always bottom of my class, so much so that I left education at the age of 16 with no qualifications to my name.
One thing I was good at, and enjoyed, was working. I began working at a noticeably young age, 12, when I convinced the owner of the chemists in Belsize Park (a few doors down from Budgens) to give me a job after school. I was paid £1 in the evenings for cutting up boxes and doing odd jobs around the shop. I loved working, I loved the money, and it was something I felt I was good at, albeit it was just cutting up boxes!
In the summer of 1990, at the age of 14, I worked in the Royal Parks hiring out deck chairs for a gentleman whose mum lived next door to us in Tudor Close; he owned the concessions in all the Royal Parks. We charged 50p per chair and we received 10% for every chair hired. It was a long day, starting very early getting the chairs out and finishing late at night, having to stack the chairs away. We had to carry around the old bus ticket machines – they were huge and weighed a ton, those old enough to remember them will know what I mean. I was leaving the flat at 7am and not returning home until after midnight but I loved every second of it. I was rather good at hiring out the chairs and was regarded as one of, if not the, best vendors.
I always wanted to get into Investment Banking as a child, but always thought my lack of education would be a disadvantage. However, I stumbled upon a recruitment advert in the London Evening Standard one day in 1991. I visited the recruiter, based in Baker Street, a tiny little office in the bowels of a building. The lady who placed the advert had about 20 people crammed in this tiny room where she explained the roles she had. She kept referring to the film ending of Trading Places with Eddie Murphy where they are on the floor of the Exchange, to help us understand what the jobs were like.
I ended up getting my first placement in August 1991 as a Filing Clerk at Merrill Lynch on the floor of their trading room. I was told to report into the head of Trading’s secretary, a lovely lady. All I did all day was file documents, Fannie Mae & Freddie Mac literature on the trading floor in vast cupboards. About a week into the role, I asked the secretary if she could get me an interview with the Head of Trading so I could ask him if I could get a permanent job on the Trading Floor. She got me an interview with the gentleman, who on reflection, was regarded in the company as a god and perhaps I had gone too high. I went into his office (which was the size of the flat I lived in) and he was sat, a large man, behind an ornate desk. He demanded in his American accent what I wanted, and I told him I was wanting a full-time job on the floor. He glanced up at me and asked me how old I was, “15 sir nearly 16” I replied. Incredulous he told me to get out of his office and visit the world, do things, see places and that I was far too young to be working never mind considering a role in Investment Banking! I left the room having felt I had just been hit by a truck and his lovely secretary saw I was visibly upset and sat me down at her desk. She told me not to be upset and that this was just a minor setback. She gave me a book, it was an STX directory, a telephone book with just Investment Banks details in. The book listed all the telephone numbers of the banks’ trading desks and HR departments. She told me to sit at her desk and call each company starting from the letter A. Tell them I was at Merrill Lynch and the head of trading’s PA told me to call them as I am looking for a job. I did as I was told and got to letter G in the directory. I called a company called GT Asset Management and spoke with HR. The lady said she had a junior opening for a “Runner” and that I should pop in for a meeting.
I went for the interview the next day, and was interviewed by a lovely man, Nigel Douglas. The interview was going badly, I had no experience, and I was struggling. I saw that Nigel had a pen and was taking notes. The pen had the name Charlton Athletic on its side. As the questions kept coming, I was more and more convinced I was not going to get the job. Nigel, clearly exasperated with my answers asked, “and what do you like to do at weekends?” “I like watching football” I replied. “Oh yes, what team do you support” Nigel asked. “Charlton Athletic” I answered. “NO!!!!” Nigel said, “that’s my team!!”. “It’s not, is it?” I retorted. “Yeah, I have a season membership! How do you think we are doing this season?” he asked me. Let me stress that I had NO idea about football, never mind Charlton Athletic! I would not have been able to tell you where Charlton was on a map never mind how their season was going! “I think we are doing well! I replied with my fingers crossed that the answer would be the correct one. Nigel responded with a smile on his face, “I think we are doing great”. He then went on to talk about Charlton Athletic for some 15 mins, ending the conversation by telling me I had the job! Nigel became a good friend and even came to my wedding some years later.
The Invention:
The role at GT was simple in its structure, every 30 minutes I would go into the Front Office (trading room), pick up the trade tickets and then go back to my desk in the Middle Office and enter them into the computer and print off a Contract Note to send in the post to the client. In those days we had 10 days to settle the transaction. If a client traded on a Monday (T+0) they would get the transaction in the post by Thursday (T+3) of that week and then had until Thursday, the following week to settle the transaction.
The problem was the whole process was very manual, the salesperson would handwrite a deal ticket out (blue for buy and red for a sale). The handwritten ticket with a dozen boxes all handwritten was then passed to the trader who would have to manually time stamp it. Then they would try to interpret the badly written slip and invariably execute an incorrect order. I would then send the incorrect details to the client, who on receipt of the contract note would call us up to complain that they had bought or sold the incorrect quantity/asset or, even on some occasions, sold when we should have bought. We had 10 days to fix the issue, so it was always rectifiable, but the process was antiquated to say the least.
Computers were only just starting to make their mark; we were still using Telex machines to communicate in 1991! We had clients executing million-pound deals, waiting for confirmation of those trades on the Royal Mail! Whenever a trade left the office incorrectly, I always had to take the blame as I was the junior. There was no way anybody in the company would blame the salesperson who generates all the millions of pounds of income or the million-pound trader, no, the junior gets the blame. It was easier that way. As you can imagine, I was getting tired of being blamed for incorrect bookings; I always had to buy the drinks in the pub to “apologize” and I was spending more money on drinks than I was earning. It was at this point I realized I had to do something about it. I had to come up with an idea where there was no possibility of my blame for the errors. I thought of a process where the salesperson would enter the trade into a computer system, press a button and it gets sent to the trader. The trader sees the order, executes it, and then sends it to me. I then have the client sign up to my computer platform for a fee and send the trade on to the client immediately for them to check and approve. This solved every issue. If the salesperson entered the wrong details, HE was to blame. If the trader executed incorrectly, HE/SHE was to blame. Finally, the client received their confirmation THAT DAY, T0, so they could then confirm that the detail on the trade was correct and settle the transaction immediately. Most importantly, what this system did was exonerate me from ANY blame as it was “Straight Through Processing” (STP). I came to the sudden realization that the less opportunity for a human to touch something increases the chances of it being correct and reduces the chances of an error. Computers can do things quicker, more accurately and cheaper than any human, and this system just proved that fact.
It was around this time that the London Stock Exchange wanted to reduce the settlement period from T10 down to T5, and I was called into a meeting with the LSE and the Chairman of GT to discuss the proposal as I was deemed the subject matter expert on settlement. I told them it could not be done, and for the reasons I explained earlier. I said there was no way they could reduce settlement period and they seemed terribly upset with this news as other banks were trying to appease the LSE and tell them it could be done. The sudden realization that a 17-year-old is telling you that your idea is rubbish must have come as quite a shock!
Once the meeting was over, I was invited for drinks with the Chairman of the company as a thank you for my help. He appreciated my honesty in the meeting and asked me how it could be done because the London Stock Exchange were offering a deal to achieve their goal.
I explained to him my idea of Straight Through Processing and honestly thought nothing more of it. A few days later I was called into another meeting with the same people. The Chairman said that I had an idea and I explained STP to them. They all looked somewhat taken aback, so much so that there was just silence in the room when I finished describing the process. I left the meeting thinking that I had just ended my short career. A few hours later I got a call to return to the meeting, I thought I was for the sack, the LSE chaps had left, and the Chairman was sitting at his desk with a smile on his face. “They want you to build it!”, “I want you to build the system for them, the LSE will supply the IT chaps, they will work for you, they will do as you say and will build what you design”.
I was seconded to the LSE, I was head of the build, a 17-year-old kid telling these 50-year-old IT experts how to build my system. They sat around smoking pipes with slippers on in the office. I will not lie, it took them some time to get used to being told what to do, so much so that one person had enough and called my chairman to tell him that what I was suggesting was wrong, to which he was told to do just as I directed. I did not get any bother from that person again during the build.
The Concept:
The concept of STP is simple.
· Confirmation: I send a message to someone asking if they confirm that the details of the transaction are correct.
· Affirmation: the person receiving the confirmation affirms that the details are correct or rejects it if not.
· Allocation: the funds are moved from one person to another, instantly.
The system took about a month to build in full and, once tested, the LSE sold it to all its clients. I had returned to my “Day Job”, not realizing the enormity of what I had just built.
The Legacy
As we now know, Straight Through Processing (STP) is used in almost all industries in the world and is used just as much as the internet. When a person pays for anything using a Credit or Debit card, they are using STP. For example, a person goes into a shop and pays by card, the pin is entered, and a message is sent to the bank checking that that person has the funds available in their account. “Confirmation”, the bank checks that the funds are available and sends a message back to the machine saying approved (“Affirmation”). Finally, the funds leave the person’s account immediately and gets transferred to the shops bank – “Allocation”. Every payment in the world uses STP.
The format is not just used in banking. Another example of STP is in restaurants where, in the old days, waiters would handwrite the order and pass it into the kitchen for the chef to prepare. Now, they tap the order on a pad, and it gets sent Straight Through to the kitchen to be cooked, to Uber or Deliveroo; they all use STP. I honestly never appreciated the enormity of what I had built. It never occurred to me as a 17-year-old to patent the idea. I had never heard of patent or what it meant, I was just glad that I hadn’t been sacked for the idea and that I got my bonus that year.
There have been numerous articles written about me, without my approval or assistance. One named me a “Visionary”, another said I invented “The Holy Grail” –not bad for a boy aged 17 with no qualifications. I have been in Investment Banking now 30 years. I was named the youngest Managing Director in the industry ever, for the biggest bank in the world, at the age of 21.
Legacy
My wife tells people that I am the most famous person they will ever meet… that they have never heard off.
Written by James Karat
James Karat is the globally renowned inventor of Straight Through Processing (STP) and Confirmation, Affirmation, Allocation. He is currently a Senior BA/SME in Investment Banking. His invention revolutionised the financial market in the 1990s.
