NYSE Technologies’ Scott Fitzpatrick examines the motivations behind, and the process of, employing FIX as a service.
Little more than a decade ago, inbound FIX connectivity was a major competitive arena for the sell-side. Those who could deliver better, faster and more reliable FIX capabilities were able to capture trading volume from those who couldn’t. As early adopters pressed their advantage, and their competitors played catch up, sell-side firms built out extensive in-house operations to expand, improve and connect clients to their FIX networks.
FIX soon reached the tipping point, evolving into the de facto industry standard. Ten years ago if a sell-side lost their FIX infrastructure, they probably lost 50% of their order flow. Today, if they lose FIX infrastructure, they could lose 90% to 100% of their order flow. Maintaining fast, reliable and flexible FIX connectivity is no longer a point of differentiation. It’s another cost of doing business… another very expensive, time-consuming, distracting cost of doing business.
Flash forward to the post-crisis environment. With the entire industry under increasing cost pressures, sell-side institutions are looking for more ways to focus their resources on the efforts that decrease costs. As a major cost centre (up to $30 million a year for the largest sell-side firms), FIX connectivity has become a logical target for outsourcing initiatives. Until quite recently though, the options for outsourcing FIX connectivity were limited. FIX connectivity requires large, continuous investments in technology and specially trained people. Not many vendors had the ability to keep FIX infrastructure fully up-to-date and working well all the time.
FIX as a Service is a fully outsourced solution for the sell-side’s entire FIX infrastructure. We can host FIX infrastructure, manage it and run it. So, technology investments are no longer required and technical staff can be redeployed. While firms drive down costs, they maintain a stable and state-of-the-art environment that allows their clients to connect with them. They also retain the ability to innovate and take on new workflows and asset classes.
Maintaining interactions with clients
With outsourced FIX connectivity, sell-side firms interact with their customers in the same manner as they do now. When the phone call with the client ends, a work order is submitted or a ticket is opened to create FIX access for this client. Instead of it going to an internal technology group, though, it goes through a service provider. The interaction still takes place between the sell-side and their customers.
Streamlining and consolidating
With ongoing change in the process and products around outsourced connectivity, sell-sides can now have just one FIX infrastructure, not just on the equities desk but operating across asset classes. Instead of connecting four different ways at four different costs, client connectivity is streamlined. Technology providers are also making changes around network consolidation, so it is easier for sell-side firms to reach their client base. When a sell-side is trying to reach one of their client counterparties, there are tolls along each segment of the highway to reach their customers. Outsourcing removes some of those tolls by combining a FIX infrastructure with the client community’s network, essentially wrapping those two components up and providing one service back to the sell-side.
The sell-side has ability and agility to jump in the middle between the order flow that is being sent in by their customer and the order management system that is receiving it. So, firms can then make changes without having to adjust their order management system in-house. Changes within the workflows, and the rules of engagement between each customer, can also be done in a similar manner.
While FIX is a standard protocol, it’s deployed in many ways. Data fields are often populated depending on how one person interprets the protocol versus somebody else. Outsourcing vendors are able to get in the middle and manipulate the messages so that both parties can have the tags in the appropriate fields.
Communication is key
In providing outsourced FIX connectivity the technology vendor becomes an integral part of the clients’ organisation. So, it is essential to establish solid rules of engagement. Our clients can come in and see the status of all their connectivity. If there’s an issue, they can research it and get real time alerts providing feedback on the specific infrastructure issues. Plus, they know exactly who to call and how to rectify the problem. Those pieces really help to streamline the actual implementation and the workflow around the service.
The future of FIX
While it is now essentially for the sell-side to maintain fast, flexible and reliable FIX connectivity, it may no longer be strategically advantageous to do it in house. By outsourcing FIX, the sell-side can redeploy resources to revenue-generating efforts while reducing the cost of operations. As the industry grows increasingly competitive, outsourcing FIX infrastructure may well become standard practice for the better part of the sell-side.