Narrowing the gap – China is looking to balance domestic needs with international experience. Could FIX be the solution?
By Shi Liang
One of the advantages of being a late starter is that you get to see what everyone else is doing and assess the best model for you. This has been the case in China, where its financial markets didn’t evolve their way into electronic trading; rather they simply started with it. The question now is whether China will join much of the rest of the world in speaking FIX, or whether it will continue with its homegrown protocols.
China took advantage of its status as a relative late bloomer among the world’s financial markets, by building a high-capacity, fully electronic trading infrastructure from the outset. As its capital market liberalization plans unfolded in the 1990s, the authorities were quick to realise that a highly-automated, paperless, technology-driven marketplace was the key to encouraging efficiency, standardization, accuracy and straight through processing (STP).
As such, both the Shanghai and Shenzhen stock exchanges, launched in 1990 and 1991 respectively, were established on these principles and set the foundation and standards for highspeed electronic trading. The result was rapid growth in the country’s investment community, as well as a boost to the domestic financial technology companies, that moved swiftly to keep pace with the demand for high-speed trading.
While China’s markets are still, comparitvely speaking, in their infancy in terms of breadth and depth, this early groundwork has created one of the most highly automated trading systems in the world. While other emerging markets are still struggling to move on from legacy infrastructures or manual trading processes, China has instantly catapulted into the realm of fully STP and virtually seamless T+1 clearing and settlements in its domestic equity markets.
Since the 90s, China’s capital markets have continued to evolve, mainly through a combination of gaining experience from the international financial markets, and domestic innovation.
Automated, but not standardized
However, in keeping with several Asian exchanges, China’s marketplaces have their own unique proprietary protocols. So, while trading in Mainland China’s various marketplaces may be completely electronic, there is no single, standardized messaging standard used to transact. These factors have, to some extent, stymied its potential to develop.
Shanghai and Shenzhen stock exchanges both use their own unique protocol, while the exchange gateways to the order entry systems and network are operated via their communication subsidiaries, STOCOM (Shanghai Stock Communication Company) and SSCC (Shenzhen Securities Communications Company). Similarly, the Dalian and Zhengzhou Commodities Exchanges, as well as National Interbank trading platform, each have their own interfaces.
Still a way to go …
When China joined the World Trade Organisation in 2001, it made clear that its preference was for a prudent and steady approach in the liberalization of its economy. The approach for the financial market was twofold: sustainable development, without threatening the development of the domestic financial sector; and allowing China’s investors to gain experience in global markets without getting burnt.
While China has made incredible progress, there is still an extremely wide gap between its domestic set-up and that of the international markets. In particular, with the absence of alternative liquidity venues, its heavily-regulated stock exchanges (and its tight integration with the depository) and efficient clearing system, it is understandable that many Chinese investors still shy away from alternative venues and complex products.
To achieve this sustainable development sought by the Mainland authorities, many in the investment community are increasingly looking for ways to bring in more foreign technology, expertise and knowledge and it seems that FIX is one of the tools that can be used to narrow the gap.
Are the exchanges driving FIX …
China’s financial sector is increasingly turning its attention to FIX as an efficient and standardized messaging protocol.
In 2006, the Shanghai Stock Exchange (SSE) announced plans to launch its Next Generation Trading System (NGTS). The SSE announced that, “with an extended capacity, the NGTS can support the trading of almost all products and various trading modes.” It added that the System would lay a “solid foundation for further development and innovations in the securities market” and that NGTS would improve the cross-border trading and support the internationalization of the members’ businesses.
Underlying the NGTS is a brand new protocol called STEP. STEP was developed after extensive consultation with a panel of FIX experts and is derived from FIX4.4. Some consider it a dialect of FIX. In June, the China Foreign Exchange Trading System has adopted the use of the iMIX protocol – also based on FIX – for the national interbank trading platform.
Together these developments show an important first move into the adoption of FIX as a common protocol in China.