On the Workbench: Further Developing FIX for Equities Allocations


Led by the FPL Americas Buy-side Working Group, Post-Trade Subgroup, the benefits of using FIX for equities allocations is discussed by Greenline’s Dave Tolman, NYSE’s Chris Walsh and Fidessa’s Paul Whenham.
FIX Protocol Ltd. (FPL) launched Buy-Side Working Groups in the Americas, EMEA and Asia Pacific regions in order to provide a platform for buy-side representatives to discuss how their needs can be efficiently met by the automated trading community. The last edition of FIXGlobal focused on the group’s effort to standardize execution venue reporting and this edition will introduce another primary area of focus for the group, which has been to facilitate the expanded use of FIX for post-trade processing. To that end, the Working Group identified the primary business workflows in this area and are developing implementation guidelines for each. It is the belief of the group that industry adoption of these guidelines for implementations of these flows will substantially reduce implementation cost and time for all parties.
The objective of the FPL post-trade processing initiative for equities is to further define a FIX messaging protocol for bilateral post-trade processing between the buy-side and sell-side that can supplement existing post-trade processes and allow firms to better manage post-trade processing risks, further extend the front office success of FIX to post-trade/pre-settlement and avoid/reduce pre-transaction costs.
In post-trade processing, the buy-side allocates the trade among one or more accounts and communicates the allocations and fees to the sell-side. For US equities, the sell-side accepts or rejects the allocation instruction but does not add any additional data. For non-US equities, the sell-side may communicate additional fees back to the buy-side. Once there is agreement between the buy-side and sell-side on the allocation, there is a final account-level trade ‘confirmation’ from the sell-side that must be ‘affirmed’ by the buy-side before the trade information is forwarded to the appropriate Central Clearing Party (CCP) for clearing and settlement.
Currently the most common process is to use an intermediary system to communicate and match allocations optionally followed by a second intermediary system to communicate confirmations, match affirmations, and pass affirmed trades to the CCP.
Who will benefit most from the implementation of FIX allocations?
Both buy-side and sell-side benefit. First, having a bilateral alternative to using a common intermediary system reduces dependence on a single point of failure, thus improving overall availability. In addition, using FIX simplifies the matching and communication process as well as eliminating intermediary transaction costs for those allocations completed over FIX.
How can greater uniformity of allocations messaging be encouraged and how will that improve straight through processing?
There are many parties that must cooperate in the post-trade process – buy-sides, broker/dealers, custodian banks, central clearing – and multiple protocols and communication mechanisms are currently employed as well as considerable human intervention. Utilizing bilateral FIX messaging in itself reduces the complexity of the communication and matching process because the messages flow on the same FIX session as the orders and can be directly linked to the referenced trade executions resulting in many fewer matching issues, faster processing and lower costs. Having a uniform industry standard such as the FIX Protocol will reduce the cost and time for implementation because the many affected parties can reduce the number of protocols and connection types required to support their clients.
How can a smoother allocations post-trade process lower total trading costs?
The immediate opportunities for cost savings are the intermediary transaction charges and the people and time cost of resolving the more complicated intermediary allocation mis-match issues. However, if the industry standard FIX Protocol could be adopted at levels that reached all the way to the central clearing parties, there are significant opportunities for reduction in communication costs from just being able to use FIX-based communication, for which many of the order processing links already exist.
There is also the reduction in complexity from using FIX all the way because transactions, allocations and confirmations can be linked and traced which will result in a reduction in manual intervention to resolve issues. Finally, a common straight-through protocol would also reduce the implementation and support costs of needing different methods of allocation and/or clearing and settlement in different regions of the world.
How are allocations being addressed across other asset classes, e.g. futures, derivatives, fx?
Version 4.4 of the FIX Protocol, as with all versions of the protocol, was developed in concert with market participants including multiple major broker/dealers and many buy-side firms. It has proven to be extremely successful in reducing post-trade processing time and issues. The ‘rules-of-engagement’ specification is available on the FPL website (www.fixprotocol.org), within the FPL Americas Buy-Side Working Group section and includes futures and options-on-futures as well as single and multi-leg orders. There will be considerable benefit from using this, in terms of reduced costs and time, to any buy-side or sell-side planning to implement futures trading via FIX.
FX:Allocations via FIX for FX is in its early stages. If done via FIX, it most frequently employs pre-trade allocations which is somewhat limiting. The banks and portal vendors are just beginning to, or are in the process of, offering post-trade allocations via FIX. There is no real industry standard at this point.

Who will benefit most from the implementation of FIX allocations?
FIX allocations provide the potential for significant benefits to both buy and sell-side firms – but the ‘hows’ (‘how soon?’, ‘how much?’ and ‘how can I know for sure?’) differ dramatically across these segments.
Buy-side firms have the most immediate opportunity for FIX allocations. This is because most of their brokers support them in some form today and, as a whole, brokers have been responsive when clients want to use them. Because of this, buy-sides can integrate allocations into their FIX-based order process – providing an end-to-end trading solution that spans all brokers, asset classes and regions. By doing this, they can reduce costs and risks by better integrating their front and middle offices and gaining the flexibility they need to automate even the more challenging asset classes, such as futures, options and FX.
FIX allocations provide the most significant potential for cost and risk reduction to sell-side firms, who carry the largest share of post-trade costs and risks. However, until allocations – like orders – are widely adopted in a standard way across their clients, their benefits are diluted by the inefficiency of maintaining a fragmented set of post-trade processes. Because they are dependent on adoption and standardization across their clients, these benefits are longer term and totally dependent on their client’s commitment level to FIX.
How can greater uniformity of allocations messaging be encouraged and how will that improve straight through processing?
Encouraging uniformity of FIX allocations starts with the buy-side. They need to  prioritize it to the point where they actively participate in standards definition and then push their vendors, their trading partners and, often, their own internal functions to implement and comply. The FPL Americas Buy-Side Working Group is off to a great start driving the community in this direction.
Achieving uniformity requires establishing an equally strong, uncompromising commitment from all segments of the market, including vendors, that needs to be sustained for multiple years. Uniformity will not be the result of any single version or other ‘big bang, type transition. Instead it will be the result of a number of small steps – often taken one firm at a time.
Uniformity provides a consistent interpretation of FIX allocations messages across all trading partners who support FIX. With uniformity, firms of all types reduce the cost and risk associated with maintaining non-standard ‘work-around’ logic in their applications that process FIX allocations.
Further, uniformity begets widespread adoption – and vice versa. The sum of the two, uniformity plus widespread adoption, is the ‘nirvana’ that motivates FIX post-trade advocates across the industry.
How can a smoother allocations post-trade process lower total trading costs?
Moving traditional middle office functions, such as allocations, closer to the point of  execution provides an opportunity to reduce total trading costs by streamlining front and middle office processes and to mitigate costs associated with trade errors. In addition, this will facilitate automating more manual asset classes, particularly futures, options and FX, as well as reducing third party technology and service costs.
Who will benefit most from the implementation of FIX allocations?
Customers are increasingly looking for global middle office solutions which are more tightly coupled to their  front office solution.With FIX already dominant in  the front office as a means of electronically supporting order flows, extending this to the allocations workflow is the logical next step. As a result, both the sell-side and buy-side can benefit from improved straight-through processing and confirmation timings through leveraging their existing FIX connectivity.
How can greater uniformity of allocations messaging be encouraged and how will that improve straight through processing?
Whilst message uniformity is the ideal, without a centralised allocation matching service, FIX allocation messages will inevitably diverge across middle office solutions. This is well known in the front office, highlighting the importance of a normalised connectivity network and providing FIX solutions which abstract customers away from this divergence. This means that users receive and deliver uniform and expected allocation message flows which enable them to quickly on-board new clients and benefit from improved straight-through processing and lower exception handling.
How can a smoother allocations post-trade process lower total trading costs?
An efficient middle office, with high rates of straight through processing and confirmation timelines, will inevitably reduce costs through lower manual intervention and improved settlement. Competitive global middle office solutions must allow customers to bring their front and middle office solutions closer together, so that they can leverage the benefits of a highly automated workflow and connect to ETC services, such as Omgeo CTM and FIX allocations.