As Lloyd’s new e-commerce initiative gets underway, Alex Letts explains the very big difference between a data messaging hub and e-trading.

A senior broker told me the other day that he doubted if more than a handful of people in the industry understood the difference between a data messaging hub and an e-trading application. My ravioli paused mid-way between plate and mouth. He was exaggerating, but only to make a point. In the same way, I thought, it can cause difficulties if you don’t know the difference between ravioli and shepherd’s pie.

The short explanation is you can’t data message until you have a trading application. So, either every company in the industry must use exactly the same protocols and (ACORD) processes in their own in-house systems (system-to-system trading) or they need to use a centralised utility. For parties using the utility, all the steps of trading are the same for all users according to agreed and legally binding protocols.

In the insurance sector, system-to-system trading is tough because insurance trading does not lend itself to commoditisation or standardisation. In other sectors, there are clearing houses or inter-dealers with protocols about the trade which act as the central utilities. However, none of this exists in insurance. Hence it is now recognised by almost everyone in the industry that a central utility or e-trading application is required.

Once there is content (from trades via the utility or the in-house systems) the data messaging can kick-in. The trading content needs to be transmitted from the utility to the various participants in the trade. Given the variances of company systems this requires a data messaging post office which can receive, sort and ship the data messages in the right format for the receivers (most of whom will use a messaging gateway to catch the message and ship it to the right part of their own systems). This, then, is a data messaging service or “hub”.

It’s as simple as that. An e-trading service or “trading utility” is one part of the equation enabling electronic trading between counterparties. The other part of the equation is a data messaging service, or “messaging hub” to allow the trading information to be transmitted between the trading parties. But confusing the two is like thinking that ravioli is the same as shepherd’s pie. And if you do that, you could be in for a bit of a shock.