Itaú Asset Management’s Christian Zimmer and Hellinton Hatsuo Takada drill down into the usage of FIX in Brazil, isolating the areas where FIX is developing and where there is room to grow.
The BM&FBOVESPA (BVMF) initiative to provide market data using FIX is just the beginning of moving past the basic usage of FIX in Brazil. FIX is being implemented under the Unified Market Data Feed (UMDF) banner with the objective of integrating the traditional FIX market data and Multimedia Multiplexing Transport Protocol (MMTP) market data streams. The communication efficiency between these two needs to increase a lot, because in Brazil the trading community is starting to go beyond the simple use cases for FIX.
Besides the FIX implementations, one example of this development is the FPL initiative tasked with creating a version of the FIXimate in Portuguese, which the local FIX engineers are contributing to. In the last FPL meeting in Brazil, the local public seemed to be a little bit more aware of FIX, while the use of the FIXimate in Portuguese indicates a growing development of FIX solutions in Brazil.
Currently, some brokers are providing simple execution algos to be used in the Brazilian market. However, these are not delivered via FIXatdl, but via an algo-number indicated in a general purpose FIX-tag. Currently, the algos offered are very simple: mainly VWAP, TWAP, Iceberg, and POV. More sophisticated algos that try to gain some alpha are present too, but they are not originally created by Brazilian market participants. These kind of algos are normally developed from global brokerage firms at their headquarters in the US or Europe and then applied/adapted to the local market (what we call tropicalization).
Even if the algos were customized by the international firms to fit local market data, we have our doubts that on the actual trading floor there are many buy-side traders using these advanced methods. There are mainly two reasons for the nonusage of the advanced algos. First, there is a lack of confidence whether international teams understand well the local Brazilian market. Second, most of the time the big buy-side firms have mandates to achieve a 100% fill rate – something not guaranteed by the alpha-creating algos. This demand originates from the way the big asset management firms work in Brazil: they are more fundamental, and focused on allocation rather than trading.
The usage of FIXatdl could improve the usage of algos because of its standardization, but it is still hard to move forward on this issue.The sell-side seems not to be too enthusiastic, and thus, does not provide the buy-side with this efficient alternative. The buy-side is also not demanding it, which implies that there will be no advances.
In addition to FIXatdl, we expect the efforts of the FPL High Performance Interfaces Working Group to become applicable in the Brazilian market. The success depends on, obviously, if the exchange permits a separated access to their matching engine with this protocol dialect. But as there is always demand for lower latency, the outlook is positive for this initiative. The same might be true for the FPL Inter-Party Latency Working Group. Although there are hardware solutions to this problem and these hardware solutions may create less additional latency, it seems to be much easier for any mid-sized firm to use FIX-based latency analysis rather than buying an expensive system just for this purpose.
The FPL Americas Electronic Trading Conference, for those in electronic trading, is always a year-end highlight and this year was no exception. Sara Brady, Program Manager, FPL Americas Conference, Jordan & Jordan thanks all the sponsors, exhibitors and speakers who made this year’s conference a huge success.
The 6th Annual FPL Americas Electronic Trading Conference took place at the New York Marriott Marquis in Times Square on November 4th and 5th, 2009. John Goeller, Co-Chair of the FPL Americas Regional Committee, aptly set the tone for the event in his opening remarks: “We’ve lived through a number of challenging times… and we still have quite a bit of change in front of us.” After a difficult year marked by economic turmoil, the remarkable turnout at the event was proof that the industry is back on its feet and ready to move forward with the changes to the electronic trading space set forth in 2009.
Market Structure and Liquidity Two topics clearly stood out as key issues that colored many of the discussions at the conference – regulatory impact on the industry and market structure as influenced by liquidity, and high frequency trading. An overview of industry trends demonstrated that the current challenges facing the marketplace are dominated by these two elements. Market players are still trying to digest the events of 2008 and early 2009, adjusting to the new landscape and assessing the changing pockets of liquidity amidst constrained resources and regulatory scrutiny. The consistent prescription for dealing with this confluence of events is to take things slow and understand any proposed changes holistically before acting on these changes and encountering unintended consequences.
The need for a prudent approach towards change and reform was expressed by many panelists, including Owain Self of UBS. According to Self, “Everyone talks about reform. I think ‘reform’ may be the wrong word. Reform would imply that everything is now bad, but I think that we’re looking at a marketplace which has worked extremely efficiently over this period.”
What the industry needs is not an overhaul but perhaps more of a fine-tuning. Liquidity is one such area that needs carefully considered finetuning. Any impulsive regulatory changes to a pool of liquidity could negatively impact the industry. The problem is not necessarily with how liquidity is accessed, but the lack of liquidity that results in the downward price movements that marked a nightmarish 2008. Regulations against dark liquidity and the threshold for display sizes are important issues requiring serious discussion.
Rather than moving forward with regulatory measures that may sound politically correct, there needs be a better understanding of why this liquidity is trading dark. While there is encouraging dialogue occurring between industry players and regulatory bodies, two things are for sure. We can be certain that the evolution of new liquidity venues is evidence that the old market was not working and that participants are actively seeking new venues. We can also be assured that the market as a messaging mechanism will continue to be as compelling a force as it has been over the last two decades.
Risk One of the messages that the market seems to be sending is that sponsored access, particularly naked access, is an undesirable practice. Presenting the broker dealer perspective on the issue, Rishi Nangalia of Goldman Sachs noted that while many agree that naked sponsored access is not a desirable practice, it still occurs within the industry. A panel on systemic risk and sponsored access identified four types of the latter: naked access, exchange sponsored access, sponsored access of brokermanaged risk systems (also referred to as SDMA or enhanced DMA) and broker-to-broker sponsored access.
According to the U.S. and Securities Exchange Commission (SEC), the commission’s agenda includes a look specifically into the practice of naked access. David Shillman of the SEC weighed in on the commission’s concern over naked access by noting, “The concern is, are there appropriate controls being imposed by the broker or anyone else with respect to the customer’s activity, both to protect against financial risk to the sponsored broker and regulatory risk, compliance with various rules?” Panelists agreed that the “appropriate” controls will necessarily adapt existing rules to catch up with the progress made by technology.
On October 23, NASDAQ filed what they believe to be the final amendment to the sponsored access proposal they submitted last year. The proposal addresses the unacceptable risks of naked access, and the questions of obligations with respect to DMA and sponsored access. The common element of both of these approaches is that both systems have to meet the same standards of providing financial and regulatory controls. . . Jeffrey Davis of NASDAQ commented on his suggested approach: “There are rules on the books now; we think that they leave the firms free to make a risk assessment. The NEW rules are designed to impose minimum standards to substitute for these risk assessments. This is a very good start for addressing the systemic risk identified.”
These steps may be headed in the right direction, but are they moving fast enough? Shillman added that since sponsored access has grown in usage there are increasing concerns and a growing sense of urgency to ensure a commission level rule for the future, hopefully by early next year. This commission proposal would address two key issues – should controls be pre-trade (as opposed to post-trade) and an answer to the very important question, “Who controls the controls?”
It is a fact that the FIX Protocol generates significant cost savings for the Global Financial Services Community. This fact is further attested by the findings of a recent study, explains Daniella Baker, FPL Marketing and Communications Manager of FIX Protocol Limited.
The past 12 to 18 months sent shockwaves through the very core of our industry. As the world’s financial markets continue to grapple with the impact of the global economic crisis, achieving greater cost reductions and generating increased efficiencies are goals that are riding high on most corporate agendas. During this period the landscape has shifted, regulatory changes have been implemented and new trading practices have emerged. As we move swiftly towards the close of the first decade of this millennium, FPL is proud to release a study entitled ‘The Benefits of the FIX Protocol’, which was produced by Oxera, one of Europe’s leading independent economic consultancies.
Oxera worked closely with Barry Marshall, previous Co-Chair of the FPL EMEA Regional Committee and Jim Northey, Co-Chair of the FPL Americas Regional Committee and Co-Founder of the La Salle Technology Group to deliver the report. The study explores the benefits that flow from the use of FIX in capital markets and amongst other findings, identifies the significant cost savings, reduced operational risk and the longer-term value that greater use of the protocol could deliver in terms of generating increased market efficiencies.
The timing of this study comes at a very poignant point in the history of FIX, as we are witnessing winds of change in adoption. FIX was originally developed as a buyside to sell-side communications tool, however trading venues and regulators across the globe are starting to take note. Listening to their user communities, they too are expressing significant interest and in many cases implementing the protocol.
A prime example of this is the Investment Industry Regulatory Organization of Canada (IIROC) and their plans to offer a new FIX-based market regulation feed specification for market surveillance and transaction reporting.
As the FIX Protocol has developed, its functionality has been significantly enhanced to provide support across the trade lifecycle for multiple asset classes. To put the impact of FIX support into perspective, the study identified that the size of the markets that currently benefit from the protocol now include the USA, Europe and Asia- Pacific equity markets, which in 2008 had an annual turnover of $113 trillion, in addition to a significant number of emerging equity markets; the government and corporate debt securities markets, which had an outstanding value globally of $83.9 trillion in June 2009; the exchangetraded derivatives markets, with notional amounts in the USA, Europe and Asia-Pacific in June 2009 of $63.4 trillion and the global over-thecounter (OTC) derivatives markets, with notional amounts in December 2008 of $591 trillion.
Delivering Actual Benefits So why has FIX proved so popular, what are the real economic benefits it offers to adopters and how can it help to achieve increased market efficiencies?
The study identifies the answers to these questions as lying in the fact that FIX offers a standardised and industry-wide solution. Standards produce ‘network effects’ because as more parties adopt a particular way of doing something, there is greater immediate benefit for new parties that subsequently adopt the same way of doing it, as well as increasing the value to those who have already adopted it.
From a FIX perspective, these benefits translate into reduced connectivity costs as FIX reduces the time and complexity involved in connecting to multiple trading partners across different geographies. Once a firm has made an initial investment in implementing FIX they can then leverage this investment across additional partners. Also, by integrating internal processes and external operations and reducing manual error rates, FIX enables firms to benefit from increased efficiencies and reduced operational risk. These factors in turn can generate greater levels of competition and innovation as switching costs are reduced and suppliers now need to provide improved service levels and more economical alternatives to remain competitive. The diagram below demonstrates the benefits that can be achieved by network effects:
Prime examples of how these factors have delivered actual benefits is the increased number of alternative trading systems now active in the U.S. As commented in the ‘The Benefits of the FIX Protocol’ study this has been significantly facilitated by standardised connectivity solutions such as FIX, because FIX enabled brokers to connect to these new trading platforms for a comparatively small cost.
From a European perspective, when the Markets in Financial Instruments Directive (MiFID) was introduced, neither the directive itself nor the Committee of European Securities Regulators (CESR) addressed the issue of communications standards for electronic trading and market data publication. At this point, many EU based exchanges operated private communications environments with proprietary message formats, which presented significant connectivity costs for users.
However, just over two years after MiFID was introduced, we are now witnessing a similar pattern in Europe as seen in the US, with several new trading venues emerging, including Chi-X, Plus Markets, Turquoise, BATS Europe and NASDAQ OMX Europe, many of which offer FIX connectivity options and present competition to the incumbent exchanges.
FIX Algorithmic Trading Definition Languagesm, or FIXatdl as it’s more succinctly known, is an emerging standard that allows for the expression of electronic trading strategies in relatively simple XML format. It is built on top of the FIX Protocol and, importantly, it’s free. However, as Portware’s Witold Sames explains, to successfully implement FIXatdl, you’ll need some careful planning and resources.
From the first broker strategy screen ever created to today’s many strategy implementations, the process of developing practical, functional, and even handsome user interfaces has not changed dramatically. To provide some context, imagine that a strategy provider (usually a sell-side trading firm) has just finished inventing and testing a strategy to provide new capabilities to their clients. Its sales team would then call on the client to explain the process and how to tweak the related parameters to make the strategy work in the client’s favor.
A graphical user interface (GUI) allows a trader to make these adjustments easily and quickly. A “typical” broker strategy screen as imagined by a broker would contain a logo to “brand the experience”, a list of entry fields (such as start and end time, volume participation limits, etc.) and controls to either send the order(s) as defined or cancel the action. To present this functionality to their clients, brokers would create documents outlining the technical details of the messages to be generated by the client’s order management system (OMS) or execution management system (EMS). Vendors would then review the specifications, perform necessary business analysis and start coding. Some artistic license with respect to layouts or control types would be taken, especially when the broker didn’t supply any layout examples. Once development completes, a walkthrough demo would be performed to validate the implementation.
The last step involves functional certification: Does the strategy GUI do what the specifications prescribed? Is it practical? Are there ambiguities? Upon sign-off, the code can then be installed for the client to use. Depending on the vendor, coding is done in any number of languages, formats, and designs – each specifically tailored to that vendors system. This is currently the most widely adopted method to integrate broker strategies into an OMS or EMS, and can be costly, both in terms of time and money. Depending on the complexities, the process can take months to complete.
The recent growth in the use of algorithmic order types, as well as the increase in the number of brokers offering them, has shown that the process does not scale well. The resulting implementations are rather static, and may require code releases to every affected client every time a change is made. When we take the number of brokers, strategies, clients, and vendors into consideration, it becomes painfully clear that there is a need to rethink this strategy.
Could FIXadtl be the answer? FIXatdl creates a framework useful to all players. It defines a broker specification on four basic levels:
Level 1 - The Core Schema This part of the FIXatdl specification contains those attributes and elements that describe the data content of the strategy order. For example, one could define that the start time parameter in a VWAP order is to be sent in tag 168, using the UTCTimeStamp data type definition. The definition of the strategy type itself (in FIX: 847=VWAP, for example) is also done here.
Level 2 - The Layout or Graphical User Interface (GUI) sub-schema The attributes and elements in this part of the FIXatdl specifications deal with the visual representation of the strategy parameters on the client’s screen. For instance, it could describe where (relative to the order entry screen itself) a start time parameter should be shown as well as define the control type to be used (a “Clock” control would be the most appropriate for the start time parameter).
Level 3 - The Validation sub-schema Attributes and elements in this schema describe any constraints placed on the parameters or combination thereof in the strategy. For example, we could stipulate that the user should see an error message if the start time chosen is not before the end time, or a percentage of volume limit is entered to be greater than 100.
Level 4 - The Flow sub-schema This schema provides the ability to control the appearance of the order entry screen. In this case, a rule could be created that disables or grays out a particular section of the order entry screen if the “Advanced Parameters” checkbox was not chosen by the user.
How FIXatdl changes the process In order to make this standard work for all parties involved, a number of conditions should be met:
1. The OMS /EMS vendor would support the standard. A system must exist that can “consume” a broker specification in FIXatdl format and render the order entry screen dynamically. The broker should support the standard.
2. In order for the vendor to make (economical) use of the new capability to read and parse FIXatdl files, it wants to receive specifications in that format (as opposed to Excel, Word, PDF, etc. formats). Some vendors have meanwhile announced support of FIXatdl, and are “translating” the legacy formatted specifications into FIXatdl themselves. Ideally, the maintenance of the FIXatdl specification is done by the broker.
CameronTec conducted a worldwide CameronFIX user survey last month to capture latest industry opinion concerning the adoption and broader usage of the FIX Protocol; movement in FIX volumes since the financial crisis hit; and the greatest challenges currently facing FIX, its users and FPL itself. Annie Walsh, Chief Marketing Officer for CameronTec sums up the findings while drawing on industry participants for further comment. Respondents to the survey represent both buy- and sell-sides, across large to smaller firms, as well as exchanges and Independent Software Vendors (ISV’s). In terms of geographic location, respondents cover every major financial precinct.
For many firms where technology is a key market differentiator on their trading desk, the need to maintain a competitive system with all the requisite functionality has importantly included FIX.
Over 75% of FIX users reported an increase in FIX volumes; with FIX usage considerably greater since the financial crisis hit in 2008. FIX investment has remained stable with 60% of firms reporting no downsizing to their FIX team over the same period.
While overall FIX usage is up worldwide, many firms did however reign in investment on new FIX infrastructure, translating to strong stability for existing FIX frameworks. Both the versions of FIX used (72% are still using FIX 4.2) and the age of their infrastructure (four years on average) indicates that firms preferred to keep with existing frameworks over anything new during the crisis, but they are now shifting gears as they look forward.
“Performance is always on the radar but in harder times project prioritisation is more a factor for long-established firms,” notes Max Colas, Chief Product Officer of CameronTec. “At the same time, the emergence of High-Frequency trading has driven stronger demands on FIX engine performance pushing the vendors to continuously deliver.”
Adds Colas: “Long-established firms have looked at recent innovations and performance upgrades in FIX engines with mixed appetites, but survey responses indicate the need for upgrades is brewing with many looking to the future and making plans with partners that will still be there tomorrow.”
There was an overwhelming consensus among respondents for the need to explore ways to reduce latency within FIX, although this enthusiasm was also met with some reservations that such efforts could, in reality materialise with a tangible outcome.
“The major challenge for big financial houses, brokers and trading firms is to achieve ultra-low-latency per inbound and outbound FIX messages in direct market access flow,” says Erika Bajer-Jurkovic at Deutsche Bank. “It is very important to accurately measure and present these latencies in the real time and flag delays. An easy to follow, unambiguous latency-measurement standard on the top of the FIX Protocol could introduce and shape new metrics with a business to be considered, especially in the area of algorithmic trading.”
Commenting on buy-side firms driving FIX latency requirements, Jet Tek’s CEO Greg Orsini says, “While there has long been pressure from buy-side firms to continually shrink market data and transaction latency, there has been no standard way to measure and communicate total latency as well as all of the constituent point-to-point latencies. Recently, the FIX Interparty Latency Working Group has been tasked with defining FIX extensions to formalise how these discrete latencies can be presented. This will provide sell-side firms the opportunity to distinguish themselves from their peers by providing new information, which their customer can use to investigate network elements, make real-time routing decisions and eliminate slow liquidity providers.”
Damian Bierman, Portware, Mo Takhim, ULLINK and Gregg Drumma, Gamma Three Trading take a closer look at the way the FIXatdl standard is changing algorithmic trading.
Without a doubt, FIXatdl is going to revolutionize the way algos work.
On the front-end, FIXatdl standardizes an algo suite’s data flow, controls, and layout. Traders like it because it provides a more predictable look-and-feel, and an overall more consistent user experience.
On the back-end, platforms supporting FIXatdl will benefit from greater ease of maintenance and updates. With FIXatdl, updates to algo specifications, or customizations that brokers wish to present to their clients, can be realized by updating a single file. Gone will be the days of having to undergo lengthy development / release cycles to affect what may be conceptually a very simple change to a couple of tags for a particular strategy. By using FIXatdl, firms will be able to significantly decrease the time-to-market for new and updated trading strategies.
Considering the advantages and current maturity of the FIXatdl standard, it appears that wide-spread adoption is just around the corner. The ever increasing need for customer controlled order behavior and the chase for best execution dictates a change in the current process, and FIXatdl is a great recipe for delivering it.
Ask any broker how seamlessly their algorithms are currently implemented in each buy-side system and even the most sophisticated algorithm providers will agree that this is a painful process that not only is expensive to them, but more importantly, time consuming.
The question remains, with the progress this industry underwent over the past few years, how does this issue still exist, while the usage of algos has skyrocketed to unprecedented levels? Enter FIXatdl, the FIX algorithmic trading definition language. It was designed based on the input from several market participants representing broker-dealers, OMS/EMS vendors, buy-side users and other vendors.
From a buy-side perspective, clients can benefit from access to their brokers’ algorithmic trading strategies as soon as they are available in FIXatdl XML format, thereby significantly reducing the resources and time spent on performing analysis and development.
From a sell-side perspective, algo providers are able to develop and build FIXatdl compliant algorithms in a matter of hours instead of months. Brokers and other algorithm suppliers also have the ability to customize specific strategies based on their client needs and submit the XML file to be rendered immediately in their client’s front-end system.
This creates a whole new race in the vendor space. A few core EMS vendors have been pro-active in the adoption of FIXatdl and are already offering this service to their clients and others are slowly following their steps.
There is no argument that the potential upside of FIXatdl is huge. The reality is that the race to adopt FIXatdl has already started; the only question that remains is when you will join?
Jay Hurley, FPL Global Foreign Exchange Committee Co-Chair and Vice President, Morgan Stanley Fixed Income, unravels FIX’s role in FX and argues for FX to be integrated into equities algo trading.
Adoption of FIX in FX
Adoption of FIX in FX for the core functions, such as streaming prices, orders and executions, has done well. Evolving from a situation where few ECN’s and banks used FIX for FX to one where the last ECN not using FIX will be FIX compatible in January of 2011. While adoption at the ECN level is almost 100%, for banks it is probably around 70%, up from 15% 5 years ago.
I would say FIX sold itself. It just naturally happens that when you get enough critical mass, after that tipping point, outliers start to look unusual. From there, it becomes more important for FIX to address more than just core functions. For instance, nondeliverable forwards (NDFs), which include most of the Asian currencies that cannot be freely traded, have some of their own specific features that need to be incorporated into the protocol.
New Developments in FIX for FX
The FIX Protocol for FX has provided an opportunity for rapid product development and deployment, and in doing so has increased competition in the market space. FIX provides the flexibility necessary for a platform provider to work with potential users to provide product enhancements. If a product doesn’t meet the needs of the market participants, it will fail quickly; but other times a new product will fill a gap and become the new force in FX trading. This process does not need regulatory oversight for it to happen - it happens by innovation.
Currently, the GFXC is working on OTC options as well. FX specific issues for options revolve around the fact that often at the end of the day, traders receive deliverable cash, so questions like ‘What is the currency of your option?’ are not as obvious. In a currency option, you have several currencies: the currency of the option, the currency that it is against and the currency of the payment, which can be a third currency.
The FPL Global Foreign Exchange Committee (GFXC) has also worked on FIX for allocations, which has some quirks for FX that are not present in equities. For example, if a fund manager has 50 sub-funds, often they will do a single FX trade, representing the net exposure of all of the funds. Rather than buying and selling some all day, they aggregate it. As a result, a single trade of ‘buy 1 million Euros, sell US Dollars,’ turns into an allocation of sell 50 million Euros, buy 150, sell 100, etc. Also, the net trade cannot be zero; otherwise, you cannot settle the trade. This issue caused a lot of consternation, but because there is still a need for a way to do the allocations in a trade where the net is very small, it was decided to have a one cent minimum.
Other factors FIX has to address include delivery and settlement dates, and NDFs cannot actually be delivered, so they are cash settled - normally in US Dollars. There are also questions regarding what fixing rate to use, because FX is an OTC market and there can be several semi-official prices to choose from.