Sell-Side Electronic Trading:
Industry Reacts to New Generation of Hackers | A New Way to Attack Market Data Costs | The Hidden Cost of Trading | In Fixed Income, FIX Is a Post-trade Solution | Algorithms Multiply to Match Trading Strategies |
In Fixed Income, FIX Is a Post-trade Solution
November 21, 2006
It took about a decade, but the FIX protocol eventually became the accepted practice for trade communications in equities trading. Yet in the fixed-income world, despite the efforts of many firms and the governing organization FIX Protocol Ltd. (FPL), the protocol has gained little ground. That is slowly changing as more firms pay attention to implementing industry standards in their post-trade processes.
FIX's challenge in bond trading has at least as much to do with debt market practices as it does with any shortcomings in the protocol. The trading is far less automated than in equities, although electronic trading is making inroads, particularly through the growing acceptance of multidealer platforms MarketAxess and Thomson TradeWeb. Industry participants are starting to believe that once FIX gets established in post-trade messaging, the protocol will find its way into pre-trade and trade execution as well.
"Post-trade begins with the notice of execution [NOE]," said Kevin Arthur, director of fixed-income markets for Omgeo, the post-trade communications utility co-owned by Thomson Corp. and Depository Trust & Clearing Corp. (DTCC). "That's become more developed in fixed income." Arthur was speaking as a panelist at the FPL Americas Electronic Trading Conference in New York in October.
The NOE is "where it's the easiest, and that's where everyone has started," said another panelist, Gail Rothman, director of straight-through processing at New York-based fund manager BlackRock. "Next would be pre-trade or trade. Last but not least would be allocations."
Arthur said that this application of the protocol is relatively recent. "There really wasn't a strong demand for FIX allocations and confirmations in the U.S. [bond] market," he said. "DTCC's ID-Confirm [now Omgeo's TradeSuite] was pretty well established. We were doing over 100,000 of those a day, and we weren't getting a lot of pressure for FIX back in 2002 and 2003. The pressure for FIX came from downstream, with the buy-side community wanting to connect to us with FIX [version] 4.4" and have FIX-compliant post-trade settlement instructions.
IOIs in Equities
In equities trading, FIX made its initial inroads in pre-trade indications of interest (IOI), which carry far less data than trade execution messages. That could be a model for how the protocol's acceptance in the bond markets expands beyond post-trade.
Omgeo's post-trade products interface to other systems including Thomson Financial's pre-trade IOI service AutEx, and Arthur said that since the introduction of version 5.0 of the Omgeo Oasys trade allocation and acceptance service in February, which includes fixed-income functionality, there has been a growing interest in FIX-compliant IOIs among bond traders.
Adoption of FIX-compliant IOIs will vary by debt class, said Ric Elvir, director of fixed-income client connectivity at UBS in Stamford, Conn. Treasuries, for one, may not require FIX. But, he added, "Other markets won't easily lend themselves to live, executable prices. The need for price discovery will always be there, which will lend itself to a need for IOIs."
BlackRock's Rothman has a view of the world that is influenced by the September completion of Merrill Lynch & Co.'s purchase of a 49.8 percent stake in her company. BlackRock was combined with Merrill Lynch Investment Managers, forming a company that has $1 trillion in assets under management, including $415 billion in fixed income.
"Merging' to us means merging systems," said Rothman. "On the fixed-income side, we are completely merged onto one platform. We've been pushing out many interfaces, whether to utilities, to brokers directly or ECNs [electronic communications networks], and getting them up and running as fast a possible. The larger you get, the more volume you have. We don't have the luxury of doing one-offs or anything nonstandard."
