FPL: Supporting the Trading Community
Once a conversation point reserved for technologists, the wide scope of activities currently being conducted by FPL is now generating wide industry attention. FPL is addressing the real business issues impacting multiple areas of the trading community on a global scale. Here is a brief insight into what the organisation has been working on over the summer months and what it will be delivering to market participants later in the year.
Understanding Buy-Side Needs
To understand and more effectively support the changing needs of the buy-side trader, FPL has formed buy-side focused working groups. Earlier this year, in an effort to achieve a more consistent response from the broker-dealer community, regarding broker reporting of the execution venue on each fill, FPL published a best practices document to help resolve these challenges. Over recent months, FPL has worked closely with buy-side representatives as they have approached their brokers to encourage adoption of these practices and this activity is planned to continue as we progress into quarter 4. The FPL EMEA Business Practices Subcommittee is also currently reviewing the recommended best practices so they can also be encouraged for adoption within the local market.
An additional area currently under the spotlight, by the FPL Americas Buy-Side Working Group, is post-trade allocations. Presently many firms are identifying a common point of failure when it comes to allocating and confirming trades using the current model. To help alleviate this risk the group is exploring the use of bi-lateral FIX for equity allocations. FIX offers functionality within this area and the group is looking at how it could increase adoption. The initial work has focused on seeking to develop a common method that is acceptable to both the buy and sell side community utilising FIX and commencing the creation of best practice documentation. We look forward to hearing more on this initiative in the coming months.
Raising Awareness of Risk Management
Early in 2011, the FPL Risk Management Working Group released an initial set of guidelines which recommended risk management best practices in equities electronic trading for institutional market participants. These were made available to the industry for review and since this time very valuable feedback has been achieved. Earlier this summer the group updated the guidelines and also extended their scope to support derivatives trading. The enhanced guidelines were shared with the FPL membership for their review during the month of August. This included review by the FPL EMEA Business Practices Subcommittee to ensure issues impacting the region were also considered and FPL is aiming to release the updated guidelines to the market in late 2011.
Additional to this, the FPL Americas Buy-Side Working Group has also commenced an initiative focused on risk mitigation. The group is looking at the potential to increase the use of test symbology for all electronically traded asset types to encourage more secure, reliable and compliant business processes. We look forward to hearing more about this initiative as it progresses.
Supporting Regulatory Developments
Encouraging regulators to develop an increased understanding of the benefits that free, open and nonproprietary standards present to the trading community and how they can be applied to enable market participants to more easily and effectively meet new regulatory requirements, continues to be a central goal of FPL. To support this effort, FPL continues to meet with regulators and respond to regulatory proposals expressing the value this approach presents.
Additionally, from a European perspective FPL has also been focused on the MiFID review which has raised important concerns around post-trade transparency and generated a desire by market participants to lead the changes needed to address these concerns. The Market Model Typology (MMT) initiative has been initiated by the Federation of European Securities Exchanges (FESE) and is supported by a number of leading data vendors. It aims to reduce the level of complexity of equity market data and significantly improve market transparency, by standardising trade flags across trading venues in Europe, including lit, off book, dark and OTC trading.
The standardisation of post-trade data is a pre-requisite for effective data consolidation and will be required regardless of which of the three options currently proposed by the European Commission are chosen under the revised MiFID directive. The reduction in complexity will also deliver cost benefits to the industry by reducing the financial implications of market data processing.
As FPL’s membership represents the cross section of firms that will be using the consolidated trading data, in late spring the MMT Steering Committee expressed a desire to work with the FPL community to gain member firm advice on how the new standards should be applied. In August, the MMT Steering Committee held its first meeting with FPL members and initial areas of focus were identified. We look forward to hearing more about this initiative as it progresses over coming months.
Increasing FIX Adoption in the Fixed Income Markets
FIX has achieved mass adoption for front-office equities trading, and its use is steadily expanding across additional asset classes. To support this growth, FPL is currently working on a number of initiatives so that the benefits of increased efficiencies and cost savings enjoyed by the equity trading community, can be extended to the trading of these asset classes.
In June, FPL welcomed the decision of a group of 12 leading investment banks to jointly engage with existing and emerging fixed income market venues and ISVs to promote increased use of FIX and other open standards such as FpML, across the trading life-cycle of all fixedincome products. This initiative was developed as Dodd–Frank reforms seek to achieve greater market transparency, by requiring most types of OTC derivatives to be cleared through clearing houses and traded on swaps execution facilities (SEFs). This is predicted to generate a surge in new market venues in the US. Similar reforms are also expected to emerge from the upcomin
g MiFID II regulations in Europe.
Over the summer months the FPL Global Fixed Income Technical Subcommittee has worked with the group and will continue to do so as we move into quarter 4. They are focused on identifying any further functionality needed to ensure FIX can effectively support the evolving business needs of the fixed-income markets and incorporating this, in addition to producing best-practice guidelines that encourage FIX use in a standardised manner and achieve maximum industry-wide benefit.
Expanding FIX Support for Foreign Exchange Trading
To enable FIX to more effectively support foreign exchange (FX) trading, over the summer FPL launched an initiative to improve FIX coverage of exchange-traded and OTC FX options. Initially focusing on vanilla options and simple strategies (including non-deliverable currencies) and then moving onto exotics and more complex strategies, the work of this group is expected to continue well into quarter 4.
Creating a Benchmark for Latency Measurement
FPL is focused on developing standards that address business challenges and latency measurement, due to its lack of standardisation, is a current area of focus. Without industry benchmarks, making omparisons and understanding the ever-decreasing latency levels reported by firms can cause much confusion. For example, there are many points in the transaction of a trade where latency could be measured and currently there are no industry-wide recommendations as to which point this should be. Additionally, latency is often quoted as a single number; whilst the latency of a single order can be reflected as a single number, the reality is that exchanges process many thousands of orders each day, some of which are faster than others. Unsurprisingly, the latency numbers often quoted, however, relate to the trades that achieved the strongest esults and this can be just a small proportion of those overall.
A further challenge is the actual process of measurement across disparate locations. To measure latency in different locations, a common timing device is needed at either end of the communications link and currently only proprietary communication protocols are available to market participants.
Keen to address these challenges and increase efficiencies in this area, late last year FPL launched the FIX Inter-Party Latency (FIXIPL) Working Group. Since its formation, group members have been working to develop the industry’s first free, open and non-proprietary standard, to consistently measure the latency of a trade as it travels through systems at exchanges, trading venues and investment banks. Additional to this, the group is also preparing a set of industry guidelines to encourage common latency reporting to enable like-forlike comparisons to be achieved. Testing of the new standard was conducted in three independent real-world environments by separate FPL member firms earlier this year. This has been followed by further testing over the summer months to incorporate additional functionality that will meet all comprehensive business needs and ensure the standard effectively supports industry requirements when it is released to the market in quarter 4.
Expanding the FPL Community
FPL continues to work with members in different regions globally to support local trading communities. In response to local FPL member firm requests over recent months, FPL has launched new subcommittees for the German and Nordic trading communities.
Each group is focused on more effectively addressing local electronic trading needs and providing educational opportunities for market participants to develop a stronger understanding of how increased use of the FIX family of standards could encourage increased marketwide efficiencies and cost savings. Following initial meetings each group has now created a list of areas that they would like their committee to focus on and is presently prioritising these activities ready for their commencement in coming months.
These are just some of the many initiatives currently underway by FPL, all ultimately focused on supporting the evolving business needs of the trading community. Participation in these initiatives is open to FPL Member firms and we encourage their involvement, for more information please contact the FPL Program Office by email at FPL@fixprotocol.org. If your firm is not a member of FPL, but would be interested in finding out more about how to join please contact Bernie Simon, FPL Membership Relations Manager by email at firstname.lastname@example.org.