Exchanges Embrace the FIX Protocol to Shore up Competitive Positions

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By Annie Walsh
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.
The Nordic Growth Market (NGM) is a good example of an exchange who has applied this approach. Choosing a proprietary interface over a standard like FIX has consequences beyond just order data. Latency data for instance are now scrutinized across the entire trading cycle and are used by some innovative trading strategies – take for example Royal Bank of Canada’s new system Thor, which bases order slicing and routing on latency data for the link to each liquidity venue. To promote transparency and fuel innovation, the industry is nearing developing standards to handle and distribute such data, such as the work of FPL’s Inter-Party Latency Working Group. New standards will thus emerge which will likely leverage and extend existing ones. As a result, an exchange that continues to use their own proprietary API over standards like FIX may be left out in the cold; isolated in the new domain and thereby excluded from those new trading strategies, or having to incur additional costs in retrofitting support for the new standards in their proprietary API.
If we examine arguments against a generic standard these are mostly around it lacking the latest functionality, and therefore market requirements. FIX versus proprietary exchange API’s varies in functionality, with degrees of variation determined by those driving them. Exchanges must weigh in competitive pressures when it comes to making technology decisions. Introducing FIX standardization and the potential resulting reduction in costs it brings, for it and also its members, has to be weighted with the market differentiation opportunity in the area of speed. Important to note, time and time again FIX has provided a greater degree of flexibility compared to proprietary exchange technology.
The FIX Protocol organization actively listens and responds to the ever evolving requirements of the financial community. If you examine both the ECNs in the US and new entrants in the European markets, virtually all of these use FIX as their primary interface. It is also no coincidence that many exchanges have launched spin-off technology businesses to
generate additional revenues but more importantly, propagate their technology choices in the hope they become the industry standard.
Today’s state of play sees the healthy, exponential uptake and adoption of FIX by a broad cross section of trading venues encompassing all sizes and shapes globally. In an increasingly cross-asset, cross-border driven execution environment, this is a good thing and most pundits would agree vastly superior to any alternate outcome.