Lisa Taikitsadaporn, of Brook Path Partners and Chair of the FPL Global Fixed Income Technical Subcommittee and Sassan Danesh of Etrading Software chart the evolution of the FPL-FICWG Initiative.
Background and Objectives In the nearly 20 years of the FIX Protocol standard, the protocol has been synonymous with equities electronic trading and has become the de facto standard used by equities trading systems globally. FIX has evolved over those years to continually support the needs of the global user community across different user groups and has expanded into additional asset classes. In 2001, FIX Protocol Ltd (FPL) signed a memorandum of understanding with the Bond Market Association (which merged with the Securities Industry Association to form SIFMA) to collaborate on enhancing the FIX Protocol to support the trading life cycle of cash fixed income products.
This initiative resulted in FIX Protocol enhancements in version 4.4 of FIX to support additional fixed income asset types, as well as supporting workflows such as quote/negotiation, post-trade allocation and confirmation/affirmation workflows. The fixed income asset types covered in the 2003 release of FIX 4.4 included: US Treasuries, Agencies, Municipals, TBA Mortgages, Corporates, Commercial Paper, Repurchase Agreements and Security Lending transactions as well as their European counterparts.
The release of version 4.4 increased the penetration of FIX into the fixed income space, primarily for buyside connectivity with electronic platforms or directly between buy-side customers and the brokerdealers. However, many of the Electronic Communication Networks (ECNs) active in the fixed income markets did not implement these specifications for connectivity by the broker-dealer community, who provide the liquidity to the markets.
In June 2011, the global investment banking community, with the support of Etrading Software and Expand Research, launched the Fixed Income Connectivity Working Group (FICWG) initiative, aiming to standardize connectivity between major sellside banks and execution venues for fixed income trading through the use of the FIX Protocol and other open industry standards. This initiative was supported by FIX Protocol Ltd. in the same month, and the result was the creation of a working group under the FPL Global Fixed Income Technical Subcommittee to produce the required recommendations to achieve the standardised connectivity.
The initial focus for FICWG in 2011 was standardisation of OTC swaps trading, which was under increasing regulatory scrutiny following the collapse of Lehman Brothers in 2008, and the resulting realisation that regulators required better and more timely information on OTC derivatives trading in order to be able to monitor systemic risk across the market. This realisation led to the mandating of the trading of standardised OTC swaps contracts onto newly established and regulated execution venues known as Swap Execution Facilities (SEFs) in the United States and Organised Trading Facilities (OTFs) in Europe.
Exchanges are modernizing, market participants are investing heavily in technology and electronic trading is on the rise. The end result? Firms today face a challenging new market environment, one that is fractured, extremely competitive, and constantly evolving. Portware's Damian Bierman explains why bringing in the experts could be the best investment you'll ever make.
Today’s global trading landscape is vastly different than it was twenty years ago. Structural, economic and regulatory forces, combined with major advancements in trading technology, have ushered in a new era of automated trading. In the United States and Europe, numerous electronic market centers – exchanges, alternative trading systems (ATSs), electronic communication networks (ECNs), and crossing networks – compete for client order flow, offering superior execution speeds, reduced market impact, anonymity, or a combination of the three. New regulations in the US (RegNMS) and Europe (MiFID) have hastened the pace of structural and technological change. As for Asia and other emerging markets, they are not far behind.
At the same time, all market participants – buy-side firms in particular – are under increased pressure to reduce trading costs and rationalize their IT budgets. This is not a new trend. While the recent economic downturn is partly to blame, the goal of bringing increased efficiencies to the trading desk predates the global credit crisis. For firms in all global markets, the challenge is twofold: deploy advanced trading technology that will allow you to navigate – and exploit – today’s complex marketplace, but do so with an eye towards long term value and scalability.
New requirements for a complex market What constitutes “advanced trading technology,” and what do firms really need to compete effectively in today’s market? To answer that question, consider the challenges posed by today’s market:
Access to fragmented liquidity. Firms today face an increasingly electronic global marketplace, and one that offers a wide choice of execution destinations. However, with increased choice comes increased responsibility for execution quality. In such an environment it is incumbent on market participants to take greater control of their order flow. From a trading standpoint, this means the ability to access all available sources of liquidity – including broker execution algorithms, crossing networks, exchanges, ECN’s and other pools of non-displayed liquidity – from a single trading environment.
Advanced trading tools and analytics. Given the complexity of the market, traders must have access to integrated toolsets with which they can make informed decisions. Pre-trade transaction cost analysis (TCA), real-time benchmarking and performance measurement, portfolio-level analytics and post-trade TCA – all of these help traders to efficiently gauge trading costs and route orders accordingly. Consolidating and integrating these toolsets into the trading process is critical. Not only does this drive efficiency, it allows for the analysis of orders at any point during the trade workflow cycle, helping firms gauge traders’ decision making processes (and overall performance).
Performance. For many firms,the recent spike in volatility has been a painful experience. Soaring trade volumes and related message traffic have crippled legacy trading systems. Unfortunately, these kinds of volumes are fast becoming the rule, not the exception. Technology that can withstand this kind of message traffic is no longer a luxury, but an absolute necessity.
True multi-asset support. The ability to trade multiple assets on a single platform offers numerous advantages to firms today. First, connecting data feeds and workflow applications to a single platform reduces integration costs and operational overhead. Second, multi asset systems can support advanced strategies such as auto hedging and multi-asset arbitrage, both of which are becoming increasingly popular.
Flexibility and ease of integration. Given the web of interconnected workflow applications, data feeds, and other third party and proprietary systems that firms have deployed, having a system that can easily interface with the rest of a firm’s technology infrastructure is another key requirement. The alternative – closed systems based on rigid technology architectures and proprietary languages – are difficult and prohibitively expensive to deploy. While the short term costs associated with deploying closed systems are considerable, the long-term costs can be enormous. The more difficult an application is to integrate, the harder it will be to upgrade it or customize it in the future. Eventually, such systems become part of a firm legacy infrastructure: out of date and costly to maintain, but too expensive to replace.