DATAROAD’s David In-hwan Lee shows how Korean traders are utilizing FIX to improve both domestic and international trading capabilities.
How has FIX adoption improved Korean trading?
It was at the end of 2002 that Korean institutions were able to process orders from foreign institutions using the FIX Protocol for the first time. During the following years the FIX Protocol in Korea developed very fast over almost a decade of use.
Before the adoption of the FIX Protocol, approximately 60 securities firms, 40 institutional investors and multiple foreign institutions had been processing orders using telephone, FAX and emails, which were very inefficient means of one-toone communication. Now, most sell-side and buy-side firms are able to place orders conveniently and promptly, and receive execution reports realtime using the FIX Protocol.
After adopting the FIX Protocol and Order Management Systems (OMSs), both institutional investors which place orders and securities firms which receive orders and execute them at the exchange were able to improve their internal trading tasks noticeably. Korean securities firms were now able to connect via networks with the trading systems of overseas institutional investors more efficiently, in contrast with the past. Moreover, since they are actively using the FIX Protocol in connection with outbound orders such as FX transactions and overseas future trading, as well as inbound orders, the adoption of FIX greatly contributed to the internationalization of the Korean securities market.
What is the opinion of Korean brokers toward algorithmic trading?
As OMSs are adopted along with the FIX Protocol, Korean securities firms perform basic algorithm trading using the automatic order system provided by their OMS. Although they currently support simple types of algorithmic trading only, I believe that more diverse algorithm trading functions will be necessary as the Korean securities industry goes through environmental changes.
The Korean securities market is expected to go through a major systemic change in the near future. Although it has not been finalized yet, securities exchanges in Korea are expected to compete with one another starting from the second half of 2012 because the establishment of an Alternative Trading System (ATS) in the Korean securities market will be allowed by then.
Also, the Korea Exchange (KRX) announced a plan for developing a next-generation trading system EXTURE+ in late July 2011. More specifically, KRX plans to develop a new system aiming for two-digit microsecond latency for its trading system. I believe that Korean securities firms should expand the functionality of their own algorithm trading for brokerage business and adopt ultra-high speed DMA systems in order to be able to perform low latency trading demanded by the algorithm trading systems commonly used by buy-side firms. As a result of the changes in the environment of the Korean securities market, High Frequency Trading (HFT) and algorithm trading are expected to develop quickly during the next several years.
What benefits have Korean buy-side firms seen since adopting FIX?
It was the buy-side that received the greatest benefit after adopting the FIX Protocol.
Before discussing the benefits of adopting FIX, it is important to know the relevant circumstances before the adoption of the FIX Protocol. During the early 2000’s (right after the IMF crisis), Korean asset managers’ systems for managing funds had several problems. For example, the distinction of the roles between fund managers and traders was unclear, the compliance system was not established and people processed orders (placing orders and confirmation of executions) manually, often using telephone, FAX or email. Moreover, although there were back office systems for calculating NAV (Net Asset Value) and accounting, they were not prepared with OMSs for their trading systems.
Brown Brothers Harriman’s Garvin Young explains the decision to adopt a Software as a Service (SaaS) trading system in lieu of traditional on-site architecture.
In its capacity as a global custodian, Brown Brothers Harriman (BBH) takes a holistic view of its trade execution process. This view includes front-end connectivity and execution, all the way through to settlement. The firm continually assesses the current and future needs of its clients to ensure that its products and solutions fully meet their requirements.
Searching for a Cutting- Edge Solution
In late 2010, given the rapidly changing landscape of the brokerage industry related to connectivity, regulation, algorithms and back-office efficiencies, we initiated a RFP process to identify an order management system that could best position its clients for the future.
Specific details of the project included a buy versus build analysis, cost/resource considerations, client retention rates, etc. Given the timeframe that we had set for implementation, it became clear that a build-from-scratch solution would have been both costly and impractical. Such a solution would have required BBH to add staff, incur IT spend, expand occupancy space, and bear significant ongoing maintenance costs.
Through the RFP process, we looked for a provider with a reputation for stability. In an environment of microsecond execution, an OMS must be reliable, stable and flexible. The ability to customize the solution was also important. The solution had to include a robust front-end while also keeping with BBH’s requirements of high-quality middle- and back-office processing. Our integrated execution and settlement product required a solution provider with strong expertise around maintaining high straight-through processing levels and real-time client reporting.
As a privately held organization, BBH maintains a high focus on risk management, which meant that a strong track record of regulatory reporting and risk management tools was also critical. The firm’s global and sophisticated client base has complex connectivity requirements, such as Reuters, Bloomberg, ULLINK, SWIFT and virtual private networks (VPNs), to name a few. Further, its clients have specific FIX tag requirements and run multiple versions of the FIX Protocol. We required a solution that was able to meet all these demands.
Identifying the Right Provider
BBH narrowed the search to six top providers of equity execution platforms and went on to select Fidessa. BBH’s Investor Services clients recognize us as a leader in technology solutions, with the capability of offering them a sustainable, long-term and flexible solution that allows them to access new markets to grow their business. We determined that their platform aligned well with these needs, and offered an ideal complement to its existing proprietary solutions.
Gen Utsumi, a longtime member of the Japanese electronic trading community, talks about how the events of 11 March 2011 may indicate the future direction of electronic trading in Japan.
When I was a teenager, I loved computers. Back then it was really exciting to wait for the release of a new personal computer every year. My first PC was the NEC PC-6001MK2 which was the first Japanese PC with synthetic voice speaking ability – it had 64KB of memory and a cassette tape player. For more than 20 years, the world of computers was a very exciting place. There were always new technologies evolving in the industry and so many talented people shared that excitement.
Now, computers are even more advanced, but people are not as excited as before. The computer industry seems to have matured. Could we say the same for electronic trading?
Nine years ago, when I started to sell FIX engines in Tokyo, ‘STP’, ‘Electronic Trading’ and ‘FIX’ were the buzzwords. Having a FIX interface was an exciting thing and sometimes when an exchange introduced their FIX interface based on real needs, they also used it as a marketing tool. Electronic trading was a frontier of the financial industry and I met a lot of people with ‘frontier spirit’. Once an electronic trading link was established via FIX or other means, new services and strategies started to emerge, such as Proprietary Trading Systems, algorithms, Smart Order Routers (SORs) and dark pools.
These, along with technological advancement, brought a wave of colocation and low-latency products and the race is still going on. Now it seems that having ‘microsecond’ latencies is not surprising anymore. Would latency be exciting again if it were in nanoseconds? My guess is, probably not. While there are still ways to make money in electronic trading, the industry seems to have matured.
Allow me to make another analogy: Japan. Japan has also matured socially and economically. Infrastructure is well established yet Japan’s boom period has long since passed. General sentiment is gloomy due to government resignations, a low birth rate, low economic growth, huge government debt, and reduced trade profits because of global competition.
Then the earthquake hit on 11 March 2011. Surprisingly, people were relatively calm in Tokyo, considering the magnitude of the event. There were many rumors circulating regarding the Fukushima Nuclear Power Plant, but people continued doing business as normally as possible. I will not repeat the grave details here, but I would like to point out that many people are starting to say that this event was a sign of change.
Now three months later, there are signs of recovery here and there. With disaster of this scale, it is obvious that help from the government is not sufficient to respond to the needs of all those people affected. Refugees are being supported by volunteers, families, neighbors and friends. There are over 2,000 refugee camps and some camps are better equipped than others.
One particular refugee camp I know is getting considerable support including food, trucks, bicycles and other living needs as well as comics for the kids – all of which are brought in by supporters. People visit the camp every weekend from Tokyo and the people in the camp welcome those supporters whole-heartedly. There was a strong mutual ‘trust’ established between the people in the camp and their supporters. The camp next to it is not doing so well; they accept donations and goods at the gate, but they do not welcome volunteers and supporters to visit their camp. There was no ‘trust’ here.
You can't change the past, but to protect the future, NASDAQ OMX’s Brian O’Malley argues, the financial services industry needs to partner with the regulators to evaluate what went wrong, which market mechanisms worked and which did not. Best practices risk management controls, O’Malley argues, must be put in place, and followed.
The current financial crisis could be described as a disaster waiting to happen. At too many institutions the basic tenets of good long term risk management were being ignored in favour of short term profits. A lack of transparency meant many investment bank boards and executives did not fully understand the risk their firms were assuming with complex new instruments. As a result, they were not able to properly assess the return they were getting for them.
At the same time, trillions of dollars worth of risky OTC contracts were being traded and cleared bilaterally around the globe without proper risk management controls, and the regulators have been accused of being asleep at the wheel.
Opinions vary, but most observers agree on one thing. If regulated exchanges and clearing houses, with proven risk management practices, had a role in the OTC derivatives markets, the crisis would not have been as severe. Therefore, these organizations must be part of the solution.
Exchanges and clearing houses assume and manage counterparty and clearing risk. The members put up capital, and collateral is collected from the counter-parties in the form of initial margin. The exchange measures and manages intra-day risk. When market volatility increases, a variation margin call is made. The positions of firms that cannot meet the margin call are liquidated. When the circumstances require it, the exchange can tap into the shared capital and the clearing corporation’s capital.
This system worked extremely well, even during the worst days of 2008. So the question is: should OTC contracts be migrated to exchange trading and central counterparty clearing?
There are precedents for central counterparty clearing in the OTC markets. CLS Bank operates the largest multicurrency cash settlement system, eliminating settlement risk for over half the world’s foreign exchange payment instructions. In the US, fixed-income marketplace, Fixed Income Clearing Corporation, processes more than US$3.7 trillion each day in US Government and mortgage-backed securities transactions.
For the last few years, the London Clearing House has operated a clearing facility for interest rate swaps. The International Derivatives Clearing Group (IDCG) recently started clearing and settling US dollar interest rate swap futures, and Liffe’s Bclear, which already clears OTC equity derivatives, started clearing credit default swaps (CDSs).
Role of risk-mitigating technologies Creative use of technology can also play a big role in mitigating risk. For example, a large NASDAQ OMX technology client is leveraging technology to minimize pre-trade risk. Its customers wanted a system that could automatically validate a counterparty’s collateral and filter out bids and offers from unacceptable trading firms. In practice, this meant, traders could only see bids and offers from firms with whom they had open credit lines. Considering the number of versions of the order book that need to be sent out, the challenge was to create a system that was robust but not overly expensive or complicated.
The NASDAQ OMX solution was to allow the client to send an order book to all its customers in a single encrypted message. Users have a decryption key that determines which view of the order book they are permitted to see. The client has been using this technology in Europe to help handle pre-trade risk in securities lending.
Despite these examples, some Wall Street firms are resistant to the idea of trading OTC instruments on exchanges and clearing them centrally. They argue that OTC contracts are far more flexible than standardized, exchange-traded contracts. Bilateral trading allows them to retain anonymity. OTCs can be traded electronically or by voice, and typically the larger the deal, the more likely it is to be executed over the phone. Moreover, many OTC instruments are off balance sheet products. If they are centrally cleared, they would have to put up collateral, such as treasury bills, to meet margin calls, and these would be would be an on-balance-sheet item.
Infosys Consulting’s Mahendra Hingmire and Parthiv Mehta explain how FIX 5.0 can improve automation, reduce costs and increase revenue through greater efficiency.
Early FIX solutions
The FIX Protocol has evolved from supporting equities to supporting messaging requirements of multiple asset classes, including derivatives,fixed income and foreign exchange.
The explosive growth of use of FIX, facilitated by the flexibility it presents, the parallel growth and use of proprietary application programming interfaces (APIs) by the exchanges, met the industry’s immediate needs for business growth. At the same time, the earlier versions necessitated certain costs on maintenance, interconnectivity and language translators.
The flexibility to create custom tags, met the needs of individual firms, however, this practice can also lead to the generation of non-standard versions of the protocol and its widespread use can result in higher costs of implementation and a longer time for deployment for the industry. Also, the tight coupling of the application layer and the business layer in FIX4.X versions limited the ability to adapt to newer functionalities offered by later FIX versions.
Demand of the Industry and FIX 5.0
The industry as a whole needed to address the limitations of the existing protocol as well as find a protocol flexible enough to support their future requirements. FPL came together to address the dual needs of its members and the outcome was FIX 5.0 and FIXT.1.1, the FIX Session Protocol, as an answer to its members’ requirements.
Transport independence disconnected business messages from their carrier thereby allowing different versions of FIX Protocols to be run on the same session via any appropriate technology, in addition to the FIX Session Protocol. This feature helped reduce technological constraints and made it possible for firms to communicate with each other regardless of their FIX version. This is possible because FIX 5.0 runs on top of the FIX Session Protocol. Transport independence serves the industry’s need to use the existing FIX versions and also help firms reduce the future cost of implementing new FIX versions.
The Vienna and Ljubljana Stock Exchanges comprehensive FIX upgrades reinforce the continued global trend for reliance on FIX over an alternate proprietary technology. Annie Walsh, Chief Marketing Officer for CameronTec, examines a case for FIX.
2010 was a pivotal year that saw many local exchanges fending off new, unfamiliar competition in what for many regions have traditionally been non-competitive market places. With competition continuing to intensify and once cozy monopolies progressively being dismantled, the stakes have rarely been higher. If regional consolidation was 2010’s buzz, then 2011 will be characterized by structural reform, increased central clearing and the emergence of a host of new players that will be ushered in as a result of Dodd-Frank and EU legislative equivalents.
The paradigm shift has been good for FIX. Looking back it was the emerging new trading venues that first demonstrated considerable appetite for FIX. Their motivation was driven by an acknowledgement that FIX could provide ease of entry into markets and a competitive edge for attracting liquidity away from the traditional exchanges. Exchanges can no longer operate in isolation within segregated vertical markets. Their consolidation due to mergers and the emergence of alternative trading venues has escalated the importance of technology around the trading lifecycle. Latest figures indicate just how much liquidity the new marketplaces are attracting. Volume for BATS, Chi-X, Pure Trading and Alpha ATS, to name a few, show significant levels of liquidity shared by a broad number of different venues.
Field-leveling regulations such as MiFID and Reg NMS have also put the spotlight on technology with a growing focus on reducing latency that has implicitly changed the exchange business model. Competition for exchanges is about performance and cost, with the highest performing and lowest cost marketplaces attracting the most liquidity. Now, more than ever, the need for a more uniform API has become a critical consideration, and this is one area where investments in technology are being made. Exchanges today recognise the considerable benefits of an exchange compliant FIX interface on a number of fronts.
The FIX Protocol is increasingly providing the level playing field for many market participants, while encouraging exchange market differentiation across more value added service areas, such as Straight Through Processing (STP), latency, trading platforms and strategies, corporate services and increased data offerings. FIX enables exchanges to take advantage of economies of scale and provide broader access as well as generate the additional revenues the business requires.
The Vienna and Ljubljana exchanges are two marketplaces within the CEE Stock Exchange Group (CEESEG), now using a cutting edge FIX API for trading access, order routing and market data. CEESEG’s decision to offer this to members is in response to participant support for the protocol over any proprietary alternative. On the business side, leveraging FIX across CEESEG’s exchange members provides a more flexible and cost efficient solution.
The appetite for the fastest possible interface will always be present and FPL’s continuous, collaborative work with the exchange community, evidenced with a number of working groups, has resulted in improved latency, making FIX messages more suitable for high speed trading. Through FIX 5.0, for example, exchange clients will find it easier to implement a more flexible, faster connection to the exchange. Exchanges are increasingly taking advantage of the latest advancements in FIX and using it to establish points-of-presence in major liquidity venues worldwide — thereby providing local connectivity for local customers, which in itself significantly reduces cross-regional connectivity costs.
The cost of defining a new protocol is considerable and these costs continue for the lifetime of the product. Every new software release must include additional regression tests based on very demanding performance tests. This will ensure performance gained is real and constant. Benefits are intrinsically about the additional flow bringing revenue that the exchange attracts, either from competitors as a result of the speed offered or from new flow that is created due to this speed. This cost calculation for customers is also important. The customer will be looking for measureable benefits and/or lower costs. If the binary interface uses FIX the cost of developing and using the interface may be lower. If the data types are common with FIX, the integration with existing OMS systems may be easier.
As recent history shows, China has a vast and diverse economic system, which contains a number of economic sub-systems, many of which have experienced growth in the last 36 months. In the media, headlines portray China to be an economic powerhouse, with expansion plans that have far reaching implications for these domains, including electronic trading in Financial Services.
One area that has seen much attention from western companies in the financial sector over the last two years is that of the Qualified Domestic Institutional Investors (QDIIs). More and more of the QDIIs, are gradually being granted authorisation by the Chinese government to trade global offshore securities in the stock, bonds and other securities. QDII programs are used in places where the capital markets are not yet completely open to all investors. For example, any institutional investor in China that obtains approval to be a QDII may invest up to 50% of net assets into allowable foreign securities, so long as not more than 5% is invested in any one security.
Background on some recent changes to the QDII programme
According to DeaconsLaw.com, the China Securities Regulatory Commission (CSRC) has confirmed it had signed Memorandum of Understandings (MOUs) with four jurisdictions, namely Australia, Germany, Korea and Luxembourg, in addition to Hong Kong, United Kingdom, Singapore, Japan and USA over the past year. This means for commercial banks, QDII investment products issued by commercial banks may invest in listed stocks and mutual funds supervised by the relevant regulatory bodies in these jurisdictions. Also, in the case of Chinese fund management companies (FMCs); in 2009 the FMCs were permitted to extend their asset management services to multiple-client accounts, following single client segregated account services, which were launched during 2008. Whereas now, FMCs may expand their managed account asset management services to include investments in offshore markets and mutual funds as well as offering QDII funds.
To be able to invest offshore, FMCs need to apply for a new QDII investment quota or use any balance of their existing QDII investment quota (originally granted for the launch of QDII funds), provided an approval is obtained from State Administration of Foreign Exchange (SAFE).
Trading offshore – Global Markets
Global Markets may be a new experience that some of these Chinese Funds’ find they have insufficient understanding or experience to adequately deal with.
This perceived shortfall of global markets trading experience manifests itself in both an opportunity and a threat, each with their own risks, neither of which can, nor should be ignored. Prudence and patience should be employed when prioritising the financial services opportunities in China; with their exceptionally high savings rate and positive trade balance providing an abundance of capital, some of which is targeted at foreign investment – Qualified Domestic Institutional Investors (QDIIs), this is a fledgling sector and is transitioning very slowly.
What is important for western companies to consider is that a lot of leg work will be necessary, whilst it may feel like a fruitless exercise, it is important to stick at it and be sure that your value proposition is appropriately reviewed in the right forum.
The financial services arena in China, is no stranger to electronic trading, this can be seen with their domestic solutions, which demonstrate a good deal more Straight Through Processing (STP) than most western organisations.
At a time when the world is facing the prospect of severe change in its power relationships and the financial industry is under worldwide scrutiny, there are few places that inspire more confidence for long-term investments than the BRICs with Brazil probably presenting the most balanced profile of growth, democracy, economic stability and diversification. Carlos Barros of Agora CTVM explains.
After many years of doing their homework across the political and macro-economic spectrum, Brazil finally emerged from the recent turmoil as an interesting harbor for the highly demanding and sophisticated international investor, and is now set to become the access point for all Latin American markets.
The Brazilian market place is rapidly evolving and following many international best practices under a regulated environment, which definitely allows innovation but also aims to protect both the market and its participants’ integrity. Practices like ‘sponsored access’ and ‘co-location’ are already being used, while concepts like best execution is being discussed by the local regulators.
The basis of this development was created by the markets’ electronification. Bovespa, the equities market, ended its pit activities in 2005 and BM&F, the futures market, followed suit in 2009, almost a year after the two exchanges merged to form BM&FBovespa, the world’s 3rd largest exchange by market value.
To meet this challenge and be more cutting-edge, not only have the exchanges and the sell-side started to arm themselves with high-end technology, but the buy-side community is increasingly interested in high frequency algorithms, low latency EMS/OMS, Straight Through Processing (STP), risk systems, and all sorts of technology solutions that might impact their trading activity in this new environment.
Once the race started, the great majority of brokers, both local and foreign, began to look for some kind of electronic capabilities in the Brazilian market, creating an incredibly strong demand for specialized services and products within the electronic trading arena.
This trend was reinforced by the exchanges’ demutualization followed by their IPOs, which provided to brokers, who formerly owned the venues, sufficient capital to invest in infrastructure and technology, at the expense of losing the subsides that formerly kept some of them alive.
Without this steady inflow, players had to pursue other options to generate commission and their business models became increasingly linked to their choice of technology.
Their options were:
Buying technology from an Independent Software Vendor (ISV), which creates dependency, but provides the assurance that the provider is fully focused on its core business;
Acquiring and merging with an ISV or another broker, which might be more expensive, but provides the assurance that the firm is incorporating a proven and tested solution as well as the knowledge base;
Developing the solution in-house, which might not be the quickest solution, but is definitely the option with the lowest cost prospects and highest knowledge aggregation rate.
In fact, the most appropriate model depends on a firm’s electronic business size, its technological maturity and its willingness to spend on both IT capital as well as personnel expenditure. However, it has been noticed that the most agile and sophisticated independent firms are being targeted by the bulge-bracket brokers and investment banks willing to increase their electronic operations.