Feargal O’Sullivan and Jamie Hill of NYSE Technologies discuss OpenMAMA, the open source middleware Agnostic Messaging API they hope will expedite innovation in services, reduce vendor lock-in and minimize implementation time and cost.
Solving a Problem Choosing a market data vendor because of their API alone is not sound practice. The issue of how to come up with a standard way of accessing market data that allows clients to select a vendor for any range of reasons – other than the API that the vendor happens to offer – has been a struggle for a long time. Something that should be low on any decision-making tree has unfortunately tended to be much more important. There are a number of different consolidated market vendors, including some obvious names like Thomson Reuters or Bloomberg and there is also a range of direct feeds or ticker plant vendors, where instead of going to a consolidator, feeds are accessed directly from an individual exchange.
In selecting a vendor, users must write all their code to suit that vendor’s particular way of accessing the data. Changing to a different vendor requires opening up the source code and altering everything to match how this other vendor wants to access the market data. With a consolidated feed for broad international access and a direct feed for low latency algo trading in US equities, for example, many users have to write according to two to four different APIs. This has been a significant problem for the industry and with OpenMAMA we are trying to drive the industry towards a standard.
User Base This API is an eight-year-old standard that was initially developed by NYSE Technologies as the Middleware Agnostic Messaging API (MAMA), and it is quite heavily deployed in the financial services industry; close to 200 clients already use this API in their custom applications, so today it has an established installed base. We have opened that up and made it a standard by taking the source code for the APIs these firms are using today and provided it to The Linux Foundation, which will physically host the code as a neutral body.
During this process we worked with multiple parties that would not ordinarily use our API. Since the launch of OpenMAMA on 31 October 2011, one of the key factors to this being taken seriously as an open installation, was getting the right level of adoption. Before we launched, we approached a number of customers, other vendors and competitors, out of whom we established our launch partners J.P. Morgan, Bank of America Merrill Lynch, Exegy, Fixnetix and EMC. These launch partners, along with NYSE Technologies, formed a steering committee to drive the direction and the future of OpenMAMA.
From that point forth, each of those organizations who are part of that committee has a stake in Open MAMA. The API is open source under the LGPL 2.1 licence, so it is now owned by the open source community. With participation from Interactive Data, Dealing Object Technologies and TS-Associates as well, we now have a group ten strong and it is a global mix comprising different industries. Whereas before the API was driven largely by NYSE Technologies and our commercial use cases, now it is being driven forward as an industry standard. The more people we have to adopt and participate, the higher the likelihood of achieving that.
Carl Weir, HSBC, provides a snapshot on the MFDV’s space, the market size, why it is interesting and the business possibilities in this market.
In the US, over the last few years, a small yet growing group of broker dealers has been stealing a march on the larger institutions for a share of the pension fund space. This group is known as Minority Female Disabled and Veteran (MFDV ) Broker Dealers. It is important to remember for the purpose of this article that MFDVs are known by such names as Qualified Minority Broker Dealers, MBE Broker Dealers, WBE Broker Dealers, Emerging Managers, Emerging Brokers, Underserved Broker Dealers and Economic Transacted Investment (ETI) Broker Dealers – to name but a few. This space requires identification for a number of reasons:
a The allocations of US state, municipal and corporate pension funds to this space are increasing year on year.
b The allocations are federal, state and municipal government mandated.
c Some MFDVs are getting allocations of funds to invest from multiple states and municipalities.
d Based on 2010 figures from Thomson Reuters, MFDVs have been outperforming larger institutions in the areas of fixed income and global equities (e.g. in 2010 MFDVs participated in 25.8% of all municipal fixed income transactions in Illinois, by volume, compared with 13.3% in New York, and 14.2% in California).
e Competitive investment performance is one of the primary factors driving demand for MFDVs among institutional investors.
f Diversification is leading to the potential for reduced risk through portfolio diversification in their investment strategies.
g Their focus is through specialization.
h They offer reduced organizational risk, and
i Reduced operational risk.
The simplest way of looking at this space, whether you are a buy-side or a sell-side institution, is to ask yourself: “Do I have a relationship, and am I obtaining order flow from a US pension fund?” If the answer is “Yes”, the assumption is that you are getting as much order flow as can be transacted with that pension fund. Then ask yourself: “Do I have a relationship, and am I obtaining order flow from a US or global investment manager of a US pension fund?”
If the answer is “Yes”, the assumption is that you are getting as much order flow as can be transacted with a US or global investment manager of a US pension fund. At this point you might see a light switch on above your head, as you ask yourself: “Hey, if the pension fund and the investment manager of the pension fund are both giving me order flow, then is the MFDV allocation of the fund not diluted between the two?” The answer is “No”.
Look at it this way... If a pension fund, for example Texas TRS (with Assets Under Management (AUM) as at 30 June 2010 of $92.3bn) dictated that 42.5% of assets are managed ‘externally’, but also states that investments through minority and women-owned businesses equals 5% of externally managed assets, then without access to MFDVs, your actual available order flow is only part of 37.5%, and so on.
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.