Refined Product: More than Raw FIX in Brazil
Itaú Asset Management’s Christian Zimmer and Hellinton Hatsuo Takada drill down into the usage of FIX in Brazil, isolating the areas where FIX is developing and where there is room to grow.
The BM&FBOVESPA (BVMF) initiative to provide market data using FIX is just the beginning of moving past the basic usage of FIX in Brazil. FIX is being implemented under the Unified Market Data Feed (UMDF) banner with the objective of integrating the traditional FIX market data and Multimedia Multiplexing Transport Protocol (MMTP) market data streams. The communication efficiency between these two needs to increase a lot, because in Brazil the trading community is starting to go beyond the simple use cases for FIX.
Besides the FIX implementations, one example of this development is the FPL initiative tasked with creating a version of the FIXimate in Portuguese, which the local FIX engineers are contributing to. In the last FPL meeting in Brazil, the local public seemed to be a little bit more aware of FIX, while the use of the FIXimate in Portuguese indicates a growing development of FIX solutions in Brazil.
Currently, some brokers are providing simple execution algos to be used in the Brazilian market. However, these are not delivered via FIXatdl, but via an algo-number indicated in a general purpose FIX-tag. Currently, the algos offered are very simple: mainly VWAP, TWAP, Iceberg, and POV. More sophisticated algos that try to gain some alpha are present too, but they are not originally created by Brazilian market participants. These kind of algos are normally developed from global brokerage firms at their headquarters in the US or Europe and then applied/adapted to the local market (what we call tropicalization).
Even if the algos were customized by the international firms to fit local market data, we have our doubts that on the actual trading floor there are many buy-side traders using these advanced methods. There are mainly two reasons for the nonusage of the advanced algos. First, there is a lack of confidence whether international teams understand well the local Brazilian market. Second, most of the time the big buy-side firms have mandates to achieve a 100% fill rate – something not guaranteed by the alpha-creating algos. This demand originates from the way the big asset management firms work in Brazil: they are more fundamental, and focused on allocation rather than trading.
The usage of FIXatdl could improve the usage of algos because of its standardization, but it is still hard to move forward on this issue.The sell-side seems not to be too enthusiastic, and thus, does not provide the buy-side with this efficient alternative. The buy-side is also not demanding it, which implies that there will be no advances.
In addition to FIXatdl, we expect the efforts of the FPL High Performance Interfaces Working Group to become applicable in the Brazilian market. The success depends on, obviously, if the exchange permits a separated access to their matching engine with this protocol dialect. But as there is always demand for lower latency, the outlook is positive for this initiative. The same might be true for the FPL Inter-Party Latency Working Group. Although there are hardware solutions to this problem and these hardware solutions may create less additional latency, it seems to be much easier for any mid-sized firm to use FIX-based latency analysis rather than buying an expensive system just for this purpose.
Another interesting initiative from BVMF is the proposal of a new blocktrading facility. The market does not have too many doubts that the fear of concurrency in the exchange space, possibly taking away market share through block trading facilities, motivated the BVMF to focus on this service in recent months. BVMF proposed the idea of creating new ticker IDs for the block trades; e.g. if you trade ITUB4 in a block, you might send an order with ITUB4b as the ticker. This does not really seem to be the best alternative, as one might simply resolve the indication of a block-trade with a FIX-tag. We assume the process will still take some time to iron out, similar to the UMDF deployment.
We mentioned above that most algos from international brokerage firms are already offered to the Brazilian buy-side community. The same holds true when it comes to FIX engines and OMS/EMS. Most of these systems are customized to Brazil or are in process of tropicalization. Most EMS vendors have the Brazilian market in their portfolio, but only the big names like FlexTrade have seen their systems be run by local firms. We expect that the trend for internationalization of Brazilian buy-side firms will increase the demand for these vendors in the local market, as connectivity will no longer be restricted to the BVMF alone.