FIX: Beyond Equity Trading
By Christian J. Zimmer and Hellinton Hatsuo Takada, Itaú Asset Management
The FIX Protocol is present whenever someone thinks about the terms “electronic” and “trading” together. Rare is the case that another protocol, i.e. a proprietary one, is used. Of course, there are several criticisms that can be leveled at the FIX Protocol. These are mainly related to performance and its text encoding, and for special demands like HFT where other protocols may currently be better. However, the FIX Protocol is consolidated as the worldwide standard, and sometimes other protocols are even being converted to it before being processed by market participants.
In the other extreme, there are cases when the market is still highly dependent on human interaction and far away from a liquid virtual trading environment. Latin American corporate bonds are examples of such securities. It is also the case for non-standardised OTC contracts. Clearly, electronic trading is not directly associated with such scenarios. For the electronification of the market, price disclosure is usually the first step. Data providers showing those prices on their screens open the door for electronic pre-trade arrangements via IOIs and RFQs. The FIX Protocol comes into play again to automate these processes.
In another scenario, when it comes to post-trade, the FIX Protocol has an important role for cost savings and reduction of operational risk. It really helps to standardise the processes among the different business partners. Unfortunately, even for the international equity markets, the number of broker dealers that currently support FIX for post-trade allocations is still limited. File uploading via FTP is very common. However, changes are taking place in this space as there is an active group within FPL led by a group of asset management firms that are encouraging FIX messaging for post-trade equities and as a result demand is expected to grow.
At Itaú Asset Management, we go even further with the FIX Protocol. We treat it as an important tool for integration between our internal systems. Everyone remembers the traditional conflict between STP and modularity. The FIX Protocol standardised and smoothed the path to modularity! There is no need for creating and managing interfaces, APIs or even Enterprise Service Buses. It is just necessary to include a FIX engine in your application and specify the communication details to every other application via an XML configuration file.
Is the FIX Protocol the best solution for all business needs? Perhaps… It depends on the specific business complexity, performance and security requirements, and on how good the apps involved can talk FIX. Writing FIX wrappers for each appliance you have will consume some development resources for a time. However, you will benefit from this in the mid-term, standardising the support and decreasing the bargaining power of system suppliers.
Talking specifically about the buy-side trading cycle, the FIX Protocol allowed us to choose the best OMS for our portfolio managers. The OMS routes the orders to our traders. Each trader can choose which EMS best suites them. No need to be a prisoner of a sub-optimal EMS-included OMS. Neither does the portfolio manager adequate his work to the traders’ choices concerning EMSs. The EMSs send the orders to our trading risk system and they are routed to the counterparties by a FIX gateway. Once again, any new connectivity or liquidity provider can be set up in a very short time at the gateway. All communication is done in FIX. Our time to business is highly reduced. No expensive, hard to change STP solution but full flexibility with no interface headaches.