As the global financial crisis hits firms worldwide, it will take longer for the FIX protocol to become a de facto standard in FX trading as IT executives grapple with where to spend their vanishing budgets. By Oksana Poltavets
It is nearly impossible to predict how long the worldwide economic crisis will last. Wall Street, The City of London and the global financial community alike have to hope for the best, but prepare for the worst when planning ahead and divvying up their shrinking IT budgets. Although some projects du jour, such as risk management, have received a much needed financial and manpower boost, other initiatives fall by the wayside.
The uptake of the FIX messaging protocol in foreign exchange (FX) trading may be yet another casualty of the cost-cutting battle in IT departments. When buy-side firms are faced with deciding how to allocate precious IT budget monies, adding or enhancing FIX capabilities might not make the cut. “With all the events going on in the market, FIX may be the last thing on their minds,” says Sang Lee, co-founder and managing partner with industry analyst firm Aite Group.
The worldwide recession is wreaking havoc not only on budgets, but also on overall global FX trading volume. Skittish investors have been pulling their funds back closer to home in an attempt to decrease their exposure to global risks. “Once the economy turns up, we’ll see more investment in FIX. We are going to need a return to happier times,” says Laurie Berke, senior consultant with analyst firm The Tabb Group.
In a move that observers say couldn’t come soon enough, the messaging standards group FIX Protocol Ltd. (FPL) has recently changed its development and release schedule for the protocol. For most of FIX’s history, it has been released in major versions. From the current version, 5.0, going forward, rather than making large protocol changes, the organization is instead restructuring this so that changes are implemented in small extension packs. An extension pack may add a new message, or it may add a single field, but the idea is that extension packs are smaller, granular, incremental changes to the protocol. Then the FPL will gather up 25 to 50 extension packs, bundle them together, and call it a service pack. This has already been done once with the release of FIX 5.0 Service Pack 1 (SP1), according to Ryan Pierce, FPL’s newly minted technical director.
Shift to Electronic Trading
The FIX protocol originally was not very applicable to FX trading, which is still done primarily on an over-the-counter (OTC) basis, with the exception of FX futures, which are traded on the Chicago Mercantile Exchange (CME). Earlier editions lacked the nuances necessary for the asset class. It wasn’t until version 4.2, which was released in 2000, that the FPL added FX support to the protocol. As standards go, nine years is a not a long time and FIX is still relatively new in FX trading, according to Mary Knox, analyst for Gartner.
Since the bulk of FX trading is conducted over inter-dealer or inter-bank platforms, as well as ECNs and individual banks, the marketplace was originally built on one-to-one connections. Banks and ECNs provided their own proprietary protocols or application programming interfaces (APIs) for customers to use. There is still no one single, consolidated location for trading in FX, nor is there a consolidated tape for market data, which initially made it difficult for electronic execution. However, volume growth and increased fragmentation of trading venues over the past several years have spurred the rise of electronic trading in FX. Last year, more than 60 percent of FX orders were executed electronically, up from 35 percent in 2001, according to an Aite Group report. The analyst firm predicts that number to rise to more than 70 percent by 2010.
However, only about 33 percent of all FX transaction occurred via FIX last year, up from 12 percent in 2004, according to Aite Group. By 2010, nearly 40 percent of all FX orders will be done through the FIX protocol. And although the need for a standard such as the FIX protocol was not as pressing as it was in the equities trading space, FIX has gained a lot of traction in FX over the past couple of years, according to market insiders.
FIX as a Standard in FX
Major FX ECNs have seen more clients, such as hedge funds and asset managers, asking for FIX connectivity versus the proprietary protocols or APIs they previously preferred. Although Hotspot FX ECN owned by Knight Captial has been offering FIX support since 2002, about 40 percent of its customers now send their orders in via FIX, according to Paul Reidy, director and head of technology for Hotspot FX. Similarly, FXall has seen an uptick in customers inquiring after FIX connectivity, says Minor Hoffman, CTO of the ECN. FXall started offering FIX as a protocol about two years ago when customer demand swelled. (For more on FXall and the fixed-income space, please turn to page 20.)
Not to be left out, Thomson Reuters hopes to offer full support for FIX across all of its platforms, new and old, by 2010, according to Richard Kiel, global head of post trade services at the vendor. Currently, Reuters’ dealing and matching platforms do not have a FIX interface, but client demand is driving the change. Still, Kiel says that a minority of FX orders it executes comes in via FIX. That is not the case for one ECN: Currenex claims that nearly 60 percent of its trading volume is done via FIX. Currenex, a subsidiary of State Street, has been pushing customers away from its Java API toward either a FIX connection or a proprietary graphical user interface (GUI), says Sean Gilman, CTO of Currenex.
Although the current economic conditions and the constrains of IT budgets have somewhat hampered the adoption of the FIX protocol in FX trading, industry experts agree that FIX will eventually be the dominant protocol in the space. The shift in power will most likely happen next year or even further out, depending on the state of global finances, among other things.
No one can dispute the benefits the equities marketplace has gained from the FIX messaging protocol. Market participants want to apply those positive aspects to reap similar rewards in FX trading. In fact, much of the driving force behind FIX adoption in FX comes from firms trading in equities. ECNs are seeing many equities market participants who want to start trading FX asking if they can use their existing infrastructure, trading platforms and connectivity for the FX space. Clients who wish to trade multi-asset strategies that include FX are also looking to be able to use one common protocol. “Ideally, they want to standardize their infrastructure as much as possible and use as much common technology as possible,” says Hotspot FX’s Reidy. Even customers who were already using a proprietary API have begun switching to a FIX connection in order to consolidate on one system within their own organizations, he adds.
As with any standard, FIX brings the added benefit of stability and ease-of-use. Integrating new customers becomes much faster when using a protocol such as FIX, because the majority of the industry is familiar with it. However, in some cases, two firms can define FIX in different ways, which could cause discrepancies. “There’s always an element of customization required for every individual but if we can drive toward a common standard, that would make things a lot easier,” says Kiel.
Although the FIX protocol is used mainly in the pre-trade and trade areas of FX, the industry could also benefit from FIX adoption in the post-trade environment. Version 5.0 of the protocol has added support for post-trade services, as well as traditional capabilities. Back-office activities such as trade notifications and allocations can be electronically delivered via FIX. In spite of its added functionality, version 5.0 has not yet gained wide traction in any asset class. The FPL plans to release the second service pack (SP2) for FIX 5.0 early in the second quarter of this year. FIX 5.0 SP2 will include added support for FX non-deliverable forwards (NDFs).
Market participants have been using FIX in FX trading for years, but the protocol has not yet become the de facto standard for the asset class. The present economic pressures on technology teams and budgets at global financial firms have slightly slowed the uptake of FIX in FX. However, the benefits of adopting one standard outweigh the financial costs to invest in FIX infrastructure and support. FX is a rapidly changing marketplace, observers note. “If they were starting from scratch, FIX would be a no-brainer. But now there needs to be an incentive to make it work,” says Lee. “It will take time.”
Source: Waters, by Oksana Poltavets, 01.04.2009
Filed under: Data Management, Exchanges, FIX Connectivity, Market Data, News, Standards, Trading Technology, Currency, Data Vendors, Exchanges, FIX, FOREX, Market Data, Mercado Electronico, negociação eletrônica, Reuters Thomson, Standards, Trade Connectivity, Transação Eletrônica, Transação Eletrônica