Martin Sexton of London Market Systems Limited examines the benefits of the SKOS network for product classifications.

Being top of the game is the aim of any trade association and FIX members are not scared of putting their heads above the trenches when it comes to identifying a clean and simple solution to an industry issue. Not only has a proposal been put forward that meets the OTC derivative products reporting requirements associated with Dodd-Frank, but it is also working with others such as ISITC and X9 to create a viable solution to meet the need for a globally acceptable classification scheme under the ISO banner. There is an overlap between these two initiatives in that financial products need to be appropriately classified; and this is where semantics has a role to play.

As soon as ontology is mentioned a concern is always raised as to the potential impact on a project due to the risk of adding latency into the deliverable time line. There is the impression that any semantic analysis is complex and yields little in tangible benefits. So what is the missing link? Could it as simple as identifying a framework capable of linking a semantic model onto a physical model?

Simple Knowledge Organisation System (SKOS) is just that framework; it allows the user to provide meaning and understanding to financial product classifications and, where appropriate, a visual representation can be used to help convey its intended use and ensure the industry exploits its capabilities and achieve maximum potential.

If we take the recent FIX Protocol regulatory reporting proposal, SKOS allows us to link the FIX terms with those outlined in the final rule (17 CFR Part 43 - Real-Time Public Reporting of Swap Transaction Data). ISDA for their part has developed a set of taxonomies. Based on four key terms the strict hierarchy under each asset class comprises three related terms, namely Base product, sub-Product and Transaction type. A further extension to this scheme is provided for commodities to support the Settlement type (this can have the value “cash” or “physical delivery”). The FIX proposal covers all asset classes and base products whilst the ISDA proposal only focuses on OTC derivative products.

The CFTC Rule identifies two key facets, namely asset class and contract type, each of which can be broken down further by sub-asset class and contract sub-type respectively. SKOS provides the ability to manage the relationship between all the terms and most important link them to the associated FIX equivalent tags.

At a high level the relationships between the CFTC’s final rule, the FIX and the ISDA proposals can be represented in a diagrammatic form.

Carl Weir of HSBC and Gregg Drumma of Gamma Three Trading discuss how the newly formed Global Cross Asset Committee (GCAC) is helping to support existing FPL asset class focused committees in their best-practice, educational and promotional efforts.

In early 2012, the FPL Global Steering Committee (GSC) discussed the need for a new committee to oversee multi-asset class activities and strategic considerations given many of the common issues and overlapping initiatives of FPL’s Derivatives, Fixed Income and Foreign Exchange committees. The GSC proposed the creation of the Global Cross Asset Committee (GCAC) to oversee the Global Fixed Income, Global Foreign Exchange, and Global Derivatives committees and report directly to the GSC.

While equity markets have matured and been electronic for some time, there has been rapid movement towards a more electronic workflow in other asset classes. Historically, each asset class was segregated, but times have changed and are continuing to do so quickly. Exchange and marketplace consolidations have expanded global liquidity to offer multiple assets. Buy-side firms are increasingly diversifying their portfolios to add a wide range of assets to manage risk and improve returns. Sell-side counterparties are offering increased access and merging desks. A subsequent need for order/execution management systems to handle combined asset coverage has driven vendors to provide solutions to support wide asset coverage. This also includes an everexpanding range of over-the-counter (OTC) products and instruments. Once the GSC recognized the need for a committee, a call for nominations for the newly formed GCAC was sent to FPL members in March 2012, with an election held soon after. Gregg Drumma, Founder and President, Gamma Three Trading, LL C and Carl Weir, EMEA Head of Cross Asset FIX Connectivity, HSBC Global Banking and Markets were elected as co-chairs for a two-year term. Both co-chairs have years of experience in the electronic trading markets of multi-asset trading.

At the time of writing, over 50 representatives from almost 40 different FPL member firms had joined the committee. The members represent a global presence and cover a complete cross section of single and multi-asset exchanges, products, sell-side, buy-side and vendor firms. The committee’s success is driven by its members and the voices from all markets and participants over the entire trade lifecycle.

The GCAC will provide oversight, guidance and help coordinate the efforts of the Derivatives, Fixed Income and Foreign Exchange committees, and provide its findings to the GSC for consideration in specifications, best-practices, and educational and promotional efforts. As a first step towards this goal, an initial survey was distributed to the GCAC members on a range of topics relating to FIX and multi-asset trading, education and forward-thinking technology crossover integration. The results are being collated to help direct the committee to the immediate needs of its members and will be published shortly for group review. The survey questions included topics relating to specific asset classes and technical concerns, regulatory issues, instruments, the discussions around professional certification and training, in addition to certification of the FIX Protocol, and also offered additional room for comment on topics not covered.

Justin Llewellyn-Jones of Fidessa explains how connectivity is adapting to meet the concerns of brokers and traders.

The ability to integrate electronic trading and FIX connectivity into receiving platforms is a minimum requirement for trading. As such, it has become something of a commoditized service. The industry no longer refers to an OMS specific connection, for example, because it does not exist. Instead, brokers rely on consolidators that eliminate the need for individual connections, and provide both asset- and application-neutral connectivity from any client.

Interest in connectivity is being revived because of the growing complexities in marrying the need for fail-safe connectivity with the need to increase revenues and cut costs in the face of persistent downward pressure on margins.

Managing connectivity requires considerable effort: monitoring and capturing order failures and rejections, identifying the source of a problem, repairing it and going back to the client and convincing them to re-send the order is a constant challenge. The costs, time and resources required to maintain the communications infrastructure and relationships with telecommunications and application service providers can be significant.

What’s more, FIX expertise is a very specialized knowledge set that commands a correspondingly high price. FIX language is really more of a framework than a firm protocol. Many participants use the language to their own end to perform tasks such as interfacing with proprietary systems, which makes expert knowledge an absolute requirement.

As an expensive, commoditized service, connectivity appears to be a technology that should be outsourced in its entirety to specialist providers. Not surprisingly, a number of brokers have questioned the value they get from owning connectivity themselves. The infrastructure, the physical network connections, the relationships with telecommunication network providers do not add value, nor do they provide better quality of execution or improved relationships with clients.

But the wholesale outsourcing of connectivity management has not happened, which leaves brokers with ‘half and half’ solutions where, for example, a vendor’s consolidator and router might be used, but relationships with network service providers are maintained in-house. Brokers want to maintain a certain level of control, and do not trust vendors to deliver a cost effective solution, or time sensitive responses and customer service.

It is also considered that core services should not be outsourced at a time when it is becoming apparent that connectivity is a critical service, and one that is hard to separate from essential revenue-raising activity.

Brokers need to improve margins by attracting more flow from increasingly selective buy-sides. They need to do so by generating new investment returns, securing recognizable market differentiation or providing liquidity. Once more, we are seeing a definite trend where the buy-side is taking on the determination of the trading strategy. What buy-side traders need is the ability to confirm a particular broker’s trading strategy and then to customize it to a particular portfolio manager or investment fund. The implication is that buy-sides will increasingly demand instant access to new strategies.

TS-Associates’ Henry Young, Co-chair of the FIX IPL Working Group, discusses the anticipated impact of the new FIX Inter Party Latency (FIX IPL) standard.

The FIX Inter Party Latency (FIX IPL) standard, version 1.0, will hit the streets shortly after this issue has gone to press. Now that all the hard work of designing, formulating and testing the standard has been completed, thoughts turn naturally to issues of adoption and impact on the market for latency monitoring solutions. But let’s first revisit the motivation for FIX IPL.

The 1.0 release of FIX IPL is designed to achieve two things:

• The standardisation of where latency is measured, and

• Interoperability between latency monitoring solutions.

The first point enables latency statistics published by different firms to be compared more meaningfully – ‘apples to apples’ style. The second point enables the latency monitoring solutions operated by different firms to be interconnected or ‘peered’, so that inter party latency can be measured without requiring each firm to operate a latency monitoring solution supplied by the same vendor.

The next point to consider is the likely adoption of such an interoperability standard. What’s in it for financial market participants, and for latency monitoring solution vendors? As participation in the FIX IPL Working Group has demonstrated, both constituents see advantages in such a standard existing and being widely adopted. This will make inter party latency monitoring easier, it will reduce costs for participants, lower the barriers to entry for new solution vendors, thereby creating a larger, broader and faster growing market for latency monitoring solutions. This will be to everybody’s advantage. Those who follow the proprietary route and fail to adopt the standard will be left out in the cold. We expect support for FIX IPL to become a standard tick box item in latency monitoring RFPs.

FIX IPL Architecture

The FIX IPL architecture has been designed to support latency monitoring for price and order flows, both FIX and non-FIX, in a wide variety of situations. This schematic shows a simple case that demonstrates the advantages of the FIX IPL interoperability standard. It shows an order flow between  two trading parties A and B. Thesecould be either a buy-side client and a broker, or a broker and an exchange. The flow is monitored in each party’s domain using a FIX IPL Source, which observes each message in the flow, extracts some content from each message for unique identification purposes and associates a time stamp with each message observation. A FIX IPL Source transmits a series of observation messages, each of which contains the unique identification content from the observed message and an observation time stamp.

The FIX IPL messages generated by each FIX IPL Source are then brought together by a FIX IPL Sink, which could be operated by either of parties A or B, or by an entirely different party C, as shown in the schematic. The FIX IPL Sink then correlates the observation messages from each of the FIX IPL Sources, matching up the message observations at A and B, and calculating latency by subtracting the observation time stamps. The resulting per-message or per-order latency metrics can then be aggregated into time interval statistics describing the latency properties of the order flow.