Cycles in the Night – Processing of a Mutual Fund Transaction

iStock_000002604280XSmallI’m retired now, but in my professional life I wrote and managed computer software applications for a mutual fund transfer agency. This particular mutual fund transfer agent provided front line client services and back end computer office support for many of the big name mutual funds in the USA.

If you own mutual funds, chances are, your data is stored on and processed by this transfer agency, not your mutual fund company.

When you call up your mutual fund and ask the phone operator to sell, say 25 shares of the fund from your account, you may think you are speaking with someone on the East coast, but you may actually be talking to someone in a totally different location – either domestic or overseas!

Although I’ve been retired for several years now, and can’t give out details or client names, I can share with you at a high level, what happens to your mutual fund transaction.

You place the order.

Whether you submit a transaction online, call it in or mail it in, your transaction data is entered into a set of related databases.

When you call your mutual fund, you probably are really speaking with a transfer agent employee (not an employee of the fund). He or she has been specifically trained in the information that is needed for each type of transaction and is sitting in a large room in front of a computer screen with multiple computer application windows open. He or she will verify your identity, look up your account information and find out what you want to do. The call is recorded, timed, reviewed and graded. As he or she interacts with you, the operator is making entries on screens to execute your orders. The online screen programs are updating databases behind the scenes. Some basic editing is done on what has been entered and if the edits fail, the online screen gives the operator an error message. For instance, if you want to redeem shares from your account and the fund has rules to make sure you don’t redeem them right after you buy them, the operator would get an error message stating that you can’t redeem shares yet.

If you send in a check to make a purchase, it most likely goes directly to the location of the transfer agency, where it is scanned electronically. Data is lifted from the scanned documents and put into databases and files where they are fed into an automated work distributor which sends transactions in a queue to be worked by a transfer agent or mutual fund client services person. Images are also captured and displayed to the person working on the transaction. Much, and in some cases all, of the data capture is automated but verification of the resulting entries is done by the transfer agent or mutual fund.

In both cases, your order has been entered, but not yet processed. Mutual fund transactions can’t be processed until after the stock market closes.

Mutual fund personnel calculate the closing share price of the fund.

Because a mutual fund is made up of many different stocks or bonds, the market must close and closing prices of each stock or bond must be received by the mutual fund before the shares of the mutual fund can be assigned a value for that day. There are many automated interfaces and people that work together every day after the stock market closes to come up with the per share price of a mutual fund.

Once they do get the price calculated, it is sent to the transfer agency so that the nightly processing cycle can start for that mutual fund client.

Nightly mutual fund processing at the transfer agency.

All through the day, the transfer agency has been updating databases for each client with that day’s purchases, exchanges, sales, changes of ownership and much more. Each night, multiple computer programs and systems execute a ‘cycle’ to further edit those transactions against other information in the system and then complete the processing. For you techie readers, where I worked, this nightly cycle utilized mainframe computers and mainframe computer programs such as COBOL. The sheer volume of transactions to be processed within a few hours dictated the use of these highly efficient computers.

This nightly cycle can’t start until the mutual fund provides the pricing for the day – which usually came in around 8 or 9 pm. The transfer agency serves many different mutual funds, with each executing their own cycle using basically the same version of software (with some client customization and many options that are set differently for different clients).

Some of the things that the programs and systems in the nightly batch cycle do are:

Editing.

Checks are made against any fund level databases to see if the trades conform to any changes made during the day by the fund. Your funds trading limits checked to make sure you weren’t trying to do a short term trade. This trade being processed for you is checked against other trades you might have made for the same fund and account today to make sure there are no conflicts. Other trade and account level edits are done as well.

If the trade meets all of the edit criteria, processing of it continues, otherwise it gets reported and rejected.

Fees.

Mutual funds sometimes charge fees, such as a redemption fee. These are calculated and subtracted from the trade amount.

Account posting.

This trade gets posted to your account. Account level totals get updated. Fund information about the number of trades, number of accounts, amounts and etc of the trading done is updated with your trade. Your cost basis information is calculated and updated.

Portfolio posting.

Your account is checked to see if it belongs with others – if you have a portfolio of accounts at this mutual fund. If so, your portfolio totals are updated as well.

Asset allocations.

If you have set up a model asset allocation with the fund, your trade total is added in to the proper part of your allocation so that when it comes time to report or re-balance, the system will know what is in each part of the model.

Multiple databases and data files are updated.

Account level, portfolio level, fund level and maybe even higher levels (such as when a mutual fund belongs to a family of funds and a fund sponsor level exists) are all updated with the information about your trade.

Data feeds are prepared for transmission to other entities.

If your mutual fund is held by a broker, as several of mine are, the transfer agency nightly cycle programs will extract data from the updated databases and automatically send them to the broker so that they can automatically update their computer systems.

Files are sent to other locations for additional processing.

Mutual fund trades (if they are not systematic transactions) require a confirmation by law. Files are prepared and sent to each company which produces confirmation output so that their systems can receive, process, print, sort and mail the confirmation information. Many output processors have post offices on site.

Online access may be static.

As the nightly cycle is running (and it usually runs through the night until around 4 am, depending on the client system and amount of data), the online computer screens may access static copies of the data at times during the cycle. Typically, however, you can still log into your account and view your data. It just may not yet show today’s activity.

Multiple cycles exist.

Not only do transactions have to be processed through a nightly cycle each business day, but there are also different cycles with different types of processing which must run each week, at month end, at quarter end and at year end.

If year end falls on a business day, all of these cycles must complete prior to the next business day starting!

The above is a very simplified description of common happenings in the processing of a mutual fund transaction. Many more functions are performed in these complex, high volume mainframe computer systems.

These types of systems are used in many different businesses and industries. Another example is the processing of credit card transactions or banking transactions.

Were you surprised by any parts of this overview?


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