By David In-hwan Lee
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?
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.
Thereafter, asset management firms overhauled their business systems in order to solve the problems explained above, and buy-side OMSs were developed for the purpose of supporting their business systems. Then, OMSs that were compatible with FIX were developed and a full-scale automation of order processing of asset management firms was underway.
In the past, without FIX or an OMS, asset management firms had no choice but to perform order-related tasks with securities firms manually, although all the data necessary for order-related tasks were already stored in the ledgers of the back office system. However, the environment is completely different now. The manual tasks mentioned above have been automated thanks to to FIX, and all relevant steps from placing orders to execution reports have been automated as the result. Various aspects of tasks such as portfolio simulation, pre-compliance, trade allocation, real-time fund evaluation, real-time order placing and execution reports through FIX have been improved.
By adopting the FIX Protocol, the Korean securities industry accomplished Straight Through Processing (STP) for orders between the buy-side and the sell-side. Moreover, asset management firms realized internal STP, in which trading data circulates from back office to front office, and vice versa.
What are some of the new services and products Korean investors are requesting from you?
With regard to products, Korean investors are expecting new low latency services, such as the development of EXTURE+, the Korean Exchange’s nextgeneration trading system, and the establishment of an ATS. In particular, because KRX not only adopted FIX and FAST as message protocols for its next-generation system, but also will construct an ultra-high speed trading system, there will be a large demand within the Korean securities industry for low latency FIX engines and the messaging middleware which supports it. Also, starting from low latency DMA and algorithm trading systems, the development of HFT-related services is expected to be more popular.
It is just as likely that there will be an increasing demand in the securities industry for the development of FIX applications in Korea. Companies like DATAROAD are preparing professional FIX training sessions for Korean developers, where users would improve their understanding of the FIX Protocol and enhance domestic development capabilities.
What is needed to increase FIX adoption in Korea?
During a short period of time, the FIX Protocol spread quickly in Korea. However, in Korea FIX still needs to be applied to more business areas and adopted by broader institutions. Thanks to the adoption of FIX by KRX for their next-generation system, the FIX Protocol, which was originally adopted for transactions between the Korean buy-side and sell-side, will be expanded to transactions between the sell-side and the exchange. Also, the adoption of FAST for market data distribution will offer yet another chance to work in the benefits of FIX, which means that the scope of the FIX application is expanded once again.
The FIX Protocol in Korea has developed and established on its own, but there are factors hindering its growth in Korea. Although FIX has been successfully established in the Korean market for many years, during the last several years non-standard versions of FIX caused problems for transactions with overseas financial institutions. In particular, in order to solve the problems associated with non-standard FIX implementations in Korea and to give it a larger role in the industry, we need to establish a Korean FIX Protocol committee which will serve as the central force for a more accurate application of FIX in the industry.
With regard to the usage of the FIX Protocol among Korean financial institutions, more than 95% of the sell-side firms are using FIX. On the other hand, of the various types of buy-side institutions, such as asset management firms, investment advisers, banks, insurance companies, pension funds and other institutions, only a few of the major asset management firms have adopted FIX for their trade messaging. In order to spread the use of FIX in Korea, more institutions on the buy-side should adopt it.
While FIX adoption and development in Korea has been led by technology vendors, from now on, users should actively step forward and develop it on their own. Members of the Korean vendor community, like DATAROAD, have helped the adoption and expansion of FIX in Korea and must take responsibility for the addressing the challenges of FIX in Korea by actively supporting training sessions and user communities.
The business application of FIX in Korea has already reached a mature stage; however, we also need more effort and institutional support for the development of the FIX Protocol in Korea. I hope that all of us upgrade the status of Korean securities industry in the world through joint research within the industry and full utilization of the FIX Protocol, just as the wave of Korean pop culture has spread into Asia and the world.
By David In-hwan Lee