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?
Futures: 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.