Courtney McGuinn, FIX Protocol, Ignatius John, Sapient Global Markets, and Bill Hebert of the FPL Global Education & Marketing Committee discuss the role FIX has played in pre-trade and trading and look forward to its application in the post-trade space.
When the FIX Protocol was introduced to the financial services industry in the early 1990s the primary, though not exclusively intentional focus of its founders and early adopters was the electronic communication of equity related pre-trade indications, order and execution messages between buy- and sell-side firms. In itself this was revolutionary for an industry which saw itself as increasingly reliant on electronic trading solutions at the markets and exchange levels. Until that point it had never actually embraced a uniform standard which competitors at all levels: asset management, broker dealer, exchange and vendor could openly agree upon.
The rest of the story is a progressive history of collaborative cooperation or ‘coopetition’ as some would refer to the joint and often volunteer efforts of a competitive universe of industry participants. As time went on, non-equity asset class instruments (derivatives, fixed income, foreign exchange, commodities etc.) were provided for in newer versions of the FIX Protocol and supported workflows expanded to illustrate more comprehensive aspects of the trading systems lifecycle including post-trade processing.
Post-trade allocations have been supported in a fundamental message type as early as FIX 2.7. Certain buy-side firms and their sell-side trade execution partners worked together to support communication of FIX allocations, but widespread adoption was limited. This was due in part to then existing limitations in the FIX post-trade formats, more traditional third party product and network options, competing technical development priorities and budget constraints by all involved parties.
Traditionally, traders on both the buy- and sell-sides viewed trading responsibilities as completed once an order had been executed. From that point on all downstream processing and any reconciliation issues were handed off to the middle and back office operational staff and the respective internal and external systems including third party solutions that supported their activities.
Although allocations and other post-trade transaction types were added and enhanced in progressive versions of FIX, in 2004 FPL launched FIX 4.4 which opened new opportunities – not only to be able to send block level trade and allocation details, but also to confirm and affirm at the block trade and account level.
Initially the enhanced post-trade functionality in the FIX Protocol attained less visibility as firms both regionally and globally were satisfactorily using a major industry utility to confirm and affirm the trades with their counter-parties before sending the settlement details to the custodian banks.
By the mid 2000’s expanded volumes and decreasing average trade sizes started to reveal significant processing issues around the confirmation and affirmation process. Because these issues did not occur as frequently, many firms did not look for other options. However, when disruptions did occur there could be significant impact on the normal functioning of the firm’s activities. This prompted a small number of buy-side firms to look for alternate solutions to communicate allocations, confirmations (block and account level) and affirmation of their trades.
In 2008, Ignatius John, subscribing to the benefits of the recent FIX provisions for post-trade designed and developed a FIX 4.4 solution which sent buy-side block level trades & allocations (message type “J”) to their sell-side broker counterparties. Counter-parties then responded with block level (message type “P”) and account level (message type “AK”) confirmation. The buy-side system would match the details from the counter-party with their in-house details and then affirm or reject (message type “AU”) the trades.
Ignatius and others saw the FIX based solution as comprehensively beneficial from several perspectives:
- It was prudent in its consideration of FIX as a globally positioned industry standard, used by virtually all buy- and sell-side electronic trading desks with either internally developed or vendor provided order and execution management systems.
- It reemphasized the importance of seamless and timely posttrade processing as part of an all-encompassing front to back straight-through solution.
- Mitigation of operational and systemic risk factors exemplified in part by the acceleration of trade comparison and the non-exclusive implementation of the FIX solution, allowing for other third party products and eliminating potential points of failure.
- Cost savings realized through systemic and human operational efficiencies and the leveraging of existing FIX and other technical infrastructure.
In keeping with the tradition of enhancing the FIX Protocol and supported workflows to meet the more current demands of a global electronic trading community, post-trade processing and related efficiencies are receiving greater attention these days.
From the simple mirroring of a firm’s notice of execution messages to its clearing firm or custodian to the implementation of a more involved institutional solution such as that provided for in FIX 4.4, many buy- and sell-side firms and solution providers are taking a closer look at the use of FIX in the post-trade process to complement its well established and rooted presence in other trading related functions.
