A co-chair of a key FIX Protocol Ltd. working group urges buy-side firms to work with their brokers to bring FIX to post-trade processes.
(In this second installment of a two-part series about the FIX electronic trading and messaging protocol, FTF News focuses on the FIX Protocol Ltd. (FPL) and its expansion of FIX into the realm of post-trade processing. In a Q&A with FTF News, Brian Lees, an assistant vice president, and software development manager for The Capital Group Companies, discusses how buy-side firms can urge their sell-side counterparties to adopt the FPL’s best practices guidelines.Lees has been an active participant in the FIX Protocol Buy-side Working Group and is serving as co-chair of the FPL Execution Venue Working Group. Lees, who has supported equity trading at the Capital Group for the past 15 years, has been part of Capital Group’s ongoing integration of the FIX protocol with the firm’s proprietary equity order management system (OMS) since 1998. The Capital Group manages the investments of individuals and large institutions via mutual funds, separately managed accounts and pooled investment funds.)
Why would FPL want to get into the thicket of the post-trade world?
The reason we undertook this was based on the input from the members of the buy-side working group. When the group formed, we surveyed everyone about where their interests lie, in terms of what they want to work on next in terms of FIX and this came up as one of the top three things. That’s the reason we undertook this to begin with.
Generally, it’s the sense that we already have this investment in FIX and these messages are out there and available so why not try and use them and give yourself another option in terms of how to initiate the post-trade process.
What versions of FIX will support post-trade processing?
FIX 4.4 is the best version because it has additional fields to support more of the post-trade needs. I think you can use 4.2 to do it but you might end up using 4.4 tags. Certainly, 4.2 would be the minimum.
What does the FPL hope to achieve by the new guidelines?
We’re trying to provide an open alternative for firms to initiate the post-trade process, which begins with the allocations of trades. Currently, FIX is used for the most part for pre-trade for indications of interest (IOIs) and for the actual trade where you send orders. … Most firms stop there with FIX. So, where this would pick up is from the point where you’ve completed the trades and you’re ready to allocate to the underlying accounts that are participating in the trade.
We’ve tried to provide some guidelines for best practices to use existing FIX messages; we’re not inventing new FIX messages for this. These messages have existed for a while—there just hasn’t been a lot of uptake in them in the past. By putting some best practices around the use of those existing messages we’re hoping to provide some common non proprietary alternatives in the market.
The general idea is that many firms have invested pretty heavily in FIX infrastructures and this extension of FIX will piggy back on their existing infrastructures. The cost to do this should be relatively low because you’re leveraging investments that you’ve already made in technology and connectivity.
What is the process for adoption?
What you tend to see a lot of times in FIX is a firm will go to a broker and say that it would like to start using this type of message—in this case, it would be to initiate the post-trade process.
A lot of times you end up with custom fields that are used to do things that are specific to a particular firm. A broker could end up with multiple different implementations of the same thing that are slightly customized for each of their customers.
If the brokers can support these best practices, then they know a lot of firms will be able to use that without any customization because we’ve already come through and tried to determine all the things that are needed across the industry.
Now, you as a buy-side firm can go to the broker and say you’d like to adopt these best practices and the broker can invest in doing what is required on their side to support it and not have to re-tweak it every time a new firm comes along.
Will the buy-side firms have to work with their vendors?
If you’re using a vendor OMS, then you would need your vendor to support it.
Will there be particular manual processes that will go away?
One of the benefits of this could be higher matching rates. One of the first things you have to do when you send an allocation is match it to trades you know. The brokers have to identify the right trade and we’ve built in an optional way of identifying trades, which offers the ability to include a FIX ID that was used on the FIX order itself, if there was a FIX order. If they passed that from their front office to the back office, when they get the allocation message they could link it up directly via the FIX ID.
Some firms thought that wasn’t necessary because they have pretty elaborate matching algorithms to match share quantity and price and so on. But we did include it in case somebody wanted it to be more exact in terms of finding the right trade. It could increase the matching rates that you see and provide better straight through processing.
What has the response been among buy-side firms?
The comments over time have shaped this quite a bit. … We had front and back office people look at it. We try to take into account some of the ways that the back office deals with this sort of stuff to make sure it works for them. There have been issues like making IDs optional instead of mandatory because some firms didn’t need the ID in order to link things up.
How long does it take to implement it?
In terms of the infrastructure you need, most firms already have that. …You might need to do some plumbing work in order to route [allocations] to the FIX engine or whatever infrastructure you’re using to transmit your FIX messages.
I think it varies from firm to firm. In general, we expect it to be relatively low cost because many firms already have a FIX infrastructure out there and it’s just a matter of how to route it into that infrastructure and send it out, and then get the affirmation messages back.
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