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Wellington Management’s Lee Saba and Capital Group’s Brian Lees and Bill Rosner discuss the FPL Americas Buy-side Working Group and its recent work on execution venue reporting.

FIX Protocol Ltd. (FPL) launched Buy-Side Working Groups in the Americas, EMEA and Asia Pacific regions in order to provide a platform for buy-side representatives to discuss  how their needs can be efficiently met by the automated trading community. As an initial task the group prioritized their main concerns which resulted in a focus on the following areas:

  • Post-Trade - generating best practices for different allocation methods and creating a central repository for ‘best practices’ that users could leverage to standardize messaging in the post-trade space.

  • Test Symbology - providing the financial community with risk averse tools for production validation of complex trading and portfolio  management systems.

  • Execution Venue - standardizing the reporting of the executing venue and creating a rules of engagement/best practices document.

The primary focus of the Execution Venue Initiative, listed above, has been to seek a more consistent response from the broker-dealer community with regards to broker reporting of the execution venue on each fill. As a result, the group has sought to standardize and expand the information received in trade reports from brokers by creating a best practices document to help resolve these challenges. The buy-side participants would like to encourage the sell-side community at large to implement these guidelines after consulting with their clients on the readiness of their systems.

Although some of the information being requested is not new and brokers have been supplying this data in their trade reports for some time, the type, amount and how information is sent from distinct brokers to the buy-side varies. Therefore, the information that is being requested as part of the guidelines will enable the buy-side traders to:

  • Increase awareness of where their orders are being filled as the market continues to fragment into dozens of dark and lit trading venues.

  • Better understand if the venues receiving their orders are the most desirable.

  • Enable money managers to determine whether or not the routing decisions of the brokers were made to the benefit of the broker or the client.

It is important to note that this initiative is not focused on any major changes to the FIX Protocol specification itself but the establishment of a set of best practices with a goal to  lead to greater consistency and standardization among broker practices.

FIXGlobal: What was the genesis of this idea?

Bill Rosner, Manager of Application Development, The Capital Group Companies and FPL Execution Venue Working Group Co-Chair: The idea to do this particular effort stemmed from a survey that FPL held in early 2010. Buy-side firms were asked to rank the importance of various streams of work that  we were preparing to undertake and the Execution Venue topic received a great deal of interest.

Lee Saba, Vice President, Wellington Management and FPL Buy Side Working Group Chairman: The execution venue concept is not a new idea but one the FPL Buy-Side Working Group felt could satisfy our trading desks’ demand for more transparency in the equity marketplace. As the Buy-Side Working Group was forming, we quickly realized we had many similar initiatives and decided to pursue them together. As a collection of buy-side firms we felt if we agreed in principal to an execution venue standard the dealers would have  more reason to adopt the request.

Brian Lees, AVP, Manager of Application Development, The Capital Group Companies and FPL Execution Venue Working Group Co-chair: As the Buy-Side Working Group was discussing where to focus its initial efforts, this topic clearly struck a chord. As the equity market has become increasingly fragmented through the proliferation of electronic venues in recent years, it feels natural to begin asking for information about where and how our order flow is being executed.

Scott Fitzpatrick, Vice President / Business Manager of FIX Marketplace for NYSE Technologies breaks down the increase in FIX allocations in post-trade, with buy- and sell-side commentary from Wellington Management and Nomura.

Recently there has been a growing trend of post-trade allocations being delivered from the buy-side to their brokers via the FIX Protocol. Over the past year, we have witnessed significant growth in the number of allocations being sent via FIX through our FIX Marketplace community. Comparing the first half of 2009 to the first half of 2010, we have found that allocations sent via FIX has grown over 70%. We believe this high growth could be the start of a true paradigm shift in how the allocation process is treated.

Post-trade allocations are the breakdowns of a block trade – executed in any asset class – to a buy-side firm’s underlying client funds. Historically, allocations have been communicated to the broker by a variety of means and methods like phone, email, or fax as well as various other electronic systems.

These typical methods are failing to keep up with the faster pace of today’s trading requirements and the need to reduce risks and costs from a firm’s trading processes. As the financial industry continues to grow in new directions, we have reached a critical juncture in how post-trade allocations are handled and many forward-thinking financial institutions are turning to FIX to help solve this issue.

Why Change is Afoot

Today’s trading systems handle thousands of client orders and instructions in mere micro-seconds. With such lightning fast systems in place, the post-trade settlement process still takes days to complete. The global banking and market crisis that has occurred over the recent years should drive financial market regulators and practitioners to seriously look at changing the settlement process by reducing the risks and costs associated with the post-trade process.

For example, in Europe, where pan-European trading platforms are becoming the norm, so too will the eventual introduction of pan-European settlement. In this case, and others, reducing risk and costs will result in changes to the lifecycle of the trade and increase the demand for much shorter settlement cycles – possibly even to settle transactions on the day of the trade.

Even without the market dictating change, firms are still looking to reduce costs in this area as every cent spent is under laser focus in order to meet investor and client demands.

Today, we see two main ways in which institutions are trying to reduce this friction through FIX.

  1. Moving traditional middle-office functions, such as allocations, closer to the point of execution
  2. Modifying current post-trade practices to include all asset classes, particularly futures, options and Foreign Exchange

Bringing Allocations Closer to the Point of Execution

Because of the industry’s demand for immediately available information, firms today are looking at trade allocations – once considered to be a purely middle office function - as being an integrated part of the trading process. Buy-side firms are moving middle-office functions like allocations onto the trading floor as they look for new ways to communicate trade details between two trading counterparties.

By moving the allocation process to the front-office, errors relating to allocations can be recognized earlier in the settlement process. This, in turn, helps to mitigate trading errors as the trade moves through the settlement process. This shift in workflow requires new ways to communicate information between trading counterparties. Since FIX is a well established protocol and is ingrained in the current trading workflow for order generation, buy- and sellside firms can take advantage of existing technologies to push FIX into the post-trade process. This has led innovative firms to begin communicating allocations and, in the future, possibly even confirmation details using the FIX Protocol.