By Daniella Baker
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.
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.
Commenting on the benefits of using a standardised protocol, Mark Howarth, CEO of Chi-X stated: “As a result of low cost connectivity, low cost technology and low cost business operations, single participants report savings to their bottom line of over US$10m per year. Across all participants, this probably totals savings to the industry of about US$500m.”
Similarly Turquoise, which has a FIX gateway to its internal API, has also benefited. Eli Lederman, CEO of Turquoise, commented: “FIX, more than anything, has transformed the economics of competition in Europe, and without the efficiency that FIX lends to the marketplace, the frictional cost of trading would have continued as it had been, and the improved liquidity that benefits investors today would have remained hidden in the cobwebs of an ancient market infrastructure.”
Additionally, the study identifies that FIX has impacted the investment manager to broker relationship by reducing switching costs, which has contributed to increased competition between brokers for the provision of execution services. Also, as it is a standardised solution, FIX allows new products to be disseminated and implemented more effectively and with increased speed. This has further contributed towards the growing number of new trading strategies and associated products now available.
As fixed costs reduce through increased capital market operational efficiencies and levels of competition rise, broker commissions and trading platform fees are likely to reduce. Over time, if these savings are passed on, they could ultimately deliver significant financial benefit to the end investor. The degree to which these savings can be maximised will depend upon two key factors, the level of standardisation applied to implementations and also the extent to which FIX is adopted by market participants, as increased levels of adoption will significantly drive the competition benefits that can be achieved.
Commenting on this point, Fod Barnes a Senior Adviser at Oxera, who proved instrumental in the report’s development, stated, “Industries that require complex communications between different players in the value chain often exhibit very strong efficiency benefits from the standardisation of those communications.
But to get the standardisation needed to realise these system wide benefits requires coordination and cooperation, which does not always happen on its own. The capital markets are a very good case in point, and this study illuminates both where these benefits have arisen, and where they could arise in the future. Given the complexity of these markets, and their economic importance, getting the standardisation right can deliver real benefits, to both investors and regulators.”
A prime example of how FPL continues on its quest to drive unnecessary cost out of the industry will be the launch of FIX Algorithmic Trading Definition LanguageSM
(FIXatdl) Version 1.1,(the version recommended for adoption), which will be released in spring 2010.
FIXatdl enables firms providing algorithmic trading services to document, in a standardised fashion, their suite of algorithmic trading strategies and associated parameters specifying how such orders should be presented on their customers’ trading system screens and how the electronic order should be expressed when transmitted via the FIX Protocol. In doing so, FIXatdl reduces the testing and coding time needed and subsequent investment required to develop innovative new algorithmic order types.
‘The Benefits of the FIX Protocol’ report provides a detailed insight into the significant value that the protocol delivers to the capital markets, demonstrating the cost savings and efficiency gains achievable, in addition to factors that could limit the extent to which these benefits can be achieved.
If you would like to download a copy of the report please visit the FPL website at www.fixprotocol.org
By Daniella Baker