Narrowing the gap – China is looking to balance domestic needs with international experience. Could FIX be the solution?

… Or is it the market?
While the SSE project has increased the buzz surrounding FIX, the main driving force has come from the Qualified Financial Institutional Investor (QFII) and Qualified Domestic Institutional Investor (QDII) schemes. These schemes – designed to offer a gradual opening of China’s markets to overseas investors, and vice versa – turned the attention of the domestic market to international practices. In doing so, the interest in FIX rose to a new level as the investment and financial technology communities sought to study its use and application for the domestic market.
Given the vibrancy of the A-share market, QFII investors and their Chinese partner brokerage firms identified the pressing need to ‘speak’ FIX and made an accelerated switch from their previous communication methods (placing orders by telephone), to using faster and more accurate electronic methods to effect orders.
To date, there are at least 10 domestic brokerage firms providing FIX-supported trading services for QFII firms, with some also providing DMA trading capabilities. These domestic brokerage firms perform the vital role of “language exchange” by providing dual-way translation between FIX and the exchange protocols so that QFII firms can send orders and receive executions virtually real-time.
The use of FIX has also extended beyond QFII into the QDII domain. In April 2007, China launched its QDII scheme, offering the first batch of qualified domestic firms a chance to invest in foreign markets. For these institutions which were already highly-attuned to fully electronic, low-touch trading methods, the need to have FIXenabled trading capabilities was a toppriority.
Today, only a small minority of institutions still rely on telephone orders to their brokers. For most QDII investors, a FIX interface is fast becoming a vital part of their trading infrastructure. A standard FIX engine, connected to an order routing network on the widely-used FIX 4.2 would serve the basic needs of most QDII firms and offers flexible, cost-efficient routing options. Most importantly, they have recognized that having a FIX-enabled infrastructure serves as a base to the advancement to DMA and algorithmic trading.
Understandably in response to the growing interest in FIX, some of China’s technology vendors have been quick to develop FIX-enabled trading platforms, as well as offering FIX education classes.
Greater liberalization, but with a cautious twist
There is little doubt that China will eventually deregulate the market for more complex products and perhaps allow the use of alternative liquidity venues. However most commentators believe the authorities will do so in a measured and cautious manner.
As trade volume continues to sky rocket and new products, with more complex business requirements, are introduced to the markets, the regulators will have to address the challenge of developing high-speed and effective communication standards across more asset classes and for more industry participants.
The rest of the global markets have already gone a long way in this process and there is no need to reinvent the wheel. Speaking FIX would no doubt present an opportunity to leverage the experience of the industry and provide some answers on how to manage these challenges.