My research paper on Fix Protocol, Circa 2006. Enjoy!
The Financial Information Exchange (FIX) protocol has become the closest thing to a truly standard form of electronic communication the securities industry has seen to date (McCormick 2002). FIX has already done a great deal to bring market participants together electronically, easing trading and making operations more efficient (McCormick 2002). FIX is flexible, having been used by firms for various functions, from Indications of Interest (IOIs) to administrative messages (McCormick 2002). “FIX will become the common language for all such trade notification, pre/post trade, real time trading, and cancel/correct trading“ states Ian Hoenisch, Chief Technology Officer and Senior Managing Director of ESP Technologies Inc. FIX will grow in the next few years with new firms using the message protocol for other areas of the trade lifecycle, according to a recent report from TowerGroup, a Needham, Mass. consulting firm (Gale Group 2006). More confirmation of the FIX protocol factor is the Chicago-based electronic exchange Archipelago which averages 180 million pre-trade FIX messages a day and had a peak day of 240 million (Sandman 2005).
What is FIX? Simply put, FIX is a language defining specific types of messages, sent electronically, in the process of executing and filling a security transaction (McCormick 2002). This language is based upon a “Tag=Value” system (McCormick 2002). It is not software; it is a protocol that defines only the format of the messages and the interaction between two applications sitting at different firms (McCormick 2002). Because of its flexibility, FIX can be used by firms to define new message types if necessary to complete a complex transaction (McCormick 2002). Several different message types can be sent via a FIX connection (McCormick 2002). The standard was designed for use in the front-office environment, including pre-trade and trade operations (McCormick 2002). Although advocates of the protocol are in talks to expand its usage (post-trade or back office), its current value is in the front-office. One important factor in the success of the FIX protocol is the fact that it is not controlled by one single entity and so can be adapted to a firm’s individual business requirements (McCormick 2002). “Most pre-trade processing is done using files or static rules currently. Pre-trade automation in FIX is just coming into being mostly equities, but it is also happening for fixed income. I don’t think much for derivatives and futures,” states Hoenisch. Currently, there is an execution time delay between pre-trade buyer’s indications of interest and seller’s designated order turnaround. FIX will help firms conduct Straight Thru Processing (STP), creating unprecedented automation in the pre-trade and trade environments (McCormick 2002).
The origins of FIX started in December of 1993, FIX was first tested via a pilot between Fidelity and Salomon Brothers After this initial success, a formal FIX Committee was created in mid-1994 (McCormick 2002). A general conference was quickly followed by a new release (2.7) and the first meeting of the FIX Technical Committee, in March of 1995 (McCormick 2002). FIX Protocol Ltd (FPL) is an organization established as an overseer of FIX, charged with keeping development moving along through the various committees it has created. The mission statement of FPL is: “To improve the global trading process by defining, managing, and promoting an open protocol for real-time, electronic communications between industry participants, while complementing industry standards.” (McCormick 2002) A large cross section of the securities industry takes part in FPL, signaling its growing importance (McCormick 2002).
The newest versions of the FIX Protocol which incorporates FIXML are pushing the protocol into the process of post-trade matching and allocation, also known as the back office operations. FIXML is an extensible markup language enhancement needed to standardize the FIX protocol. The post-trade process is dominated by a proprietary standards developed by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and a joint venture of the Depository Trust Company (DTCC) and Thompson Financial called Omgeo, LLC. “Most post-trade is done by Omgeo’s OASYS system these days. SWIFT is more the inter-bank way to communicate but mostly in Europe and SWIFT can also act as to move currency or allocations” states Hoenisch. Richard Hughes, Omgeo’s EMEA managing director says "Once the hype moves away, people will question the total cost of ownership (TCO) of implementing FIX into their environment" (STP Forum 2003). Consultants and users previously suggested that the new allocations functionality contained in FIX version 4.4 could be used to provide an alternative service that would offer matching, allocations and settlement messages at lower costs than the Thomson Financial-DTCC joint venture, Omgeo (STP Forum 2003). In response, Hughes says that while FIX is free, FIX products aren’t. If community is important, if enrichment and settlement are important, then FIX is just a small component of that. FIX doesn’t give enrichment or do matching. It is a protocol. You still need matching, you still need Standard Settlement Instructions (SSIs)," he says (STP Forum 2003). However, at a forum hosted by SWIFT, Simon Leighton-Porter of Citigroup Global Markets and the FIX Allocations Working Group outlined an alternative way to provide these services without using Omgeo, which allows for the matching and netting of trades earlier in the trade life cycle. Leighton-Porter’s suggestion, called SSI Lite, would have buy-side firms install new SSI databases that would be updated by their custodians (STP Forum 2003).
Currently the front office and back office use different systems, but if efficiency and profitability is the ultimate goal they will need to be able to have systems integrate. A standard being developed ISO 15022 XML is attempting to accomplish this monumental task. In July 2001, the FPL announced plans to team up with the SWIFT, which had been working on its own SWIFTML initiative. The collaboration centers around plans to converge their messaging protocols to create an XML-based version of the ISO 15022 protocol for securities message types, which is being developed by the International Standards Organization (ISO) Working Group 10 (XML on Wall Street). These various protocols will be reverse-engineered using business modeling techniques to create an XML Schema-based representation (XML on Wall Street). Specifically, FIX Protocol is contributing its expertise in the pre-trade/trade execution domain, and SWIFT will provide post-trade domain expertise to the ISO 15022 XML efforts (XML on Wall Street). The aim is to migrate the securities industry to a standardized use of XML to ensure interoperability across the financial industry (XML on Wall Street).
It has now been more than five years since FIX Protocol Ltd. (FPL) and SWIFT signed a memorandum of understanding that was supposed to lead to the convergence of their messaging standards, but the result has been the continued existence of two distinct message types (Sandman 2005). FPL executive director Peter Randall seemed ready to pronounce convergence dead on arrival, preferring instead the concept of interoperability (Sandman 2005). Interoperability refers to enabling two or more distinct standards to exchange data in a relatively seamless fashion; convergence would essentially roll the functionality of two standards into one (Sandman 2005). “It’s got to be interoperability” said Randall who did not hesitate to quote convergence with the ISO process and the interoperability with FIX (Sandman 2005). “It’s not only desirable, it’s achievable. Convergence, while not as desirable, is not particularly achievable. It may be a very nice pipe dream, but it won’t happen any time soon” (Sandman 2005.) Ian Hoenisch states that “The XML standards are a nice vision, but parsing and working with XML is expensive in compute time, so I do not think it will be adopted. The FIXML standard is almost a 1000 pages long and the SWIFTML standard is about 2000 pages. There is too much existing code that has been already implemented for this to change”. He goes on to comment on XML standard “As for the library dictionary, its perfect; to have the same language on both sides is what FIX lacks. SWIFT does it better, but it is still not a 100%. This is similar to analyzing a companies financial statements; one must first understand the assumptions before it can make sense. The only way a specification can work, is if there is strict adherence to it, that is the value of a specification, but the specification has to take into account extensions, just like FIX has custom TAGs, but you can’t deviate from the base specification. You can just extend it from the base”.
Scott Atwell, FIX program manager at American Century Investments highlighted this issue (Sandman 2005). Everything that the $100 billion-in assets firm communicates to broker-dealers is through FIX, but when it comes to back office, it’s outsourced (Sandman 2005). “We actually still use the (ISO) 7775 (SWIFT’s old standard) and file transfer protocol (FTP)” said Atwell. “In the last couple of years we’ve made an arrangement with JP Morgan Chase to use their SWIFT hub. They also happen to be our global custodian. So we end up sending out 7775 messages by FTP to JP Morgan. Anything that they aren’t custodians for they send out in 15022 on the SWIFT network. Anything domiciled by JP Morgan they handle themselves” (Sandman 2005).
As usage of the FIX protocol continues to grow exponentially, the standardization and seamless process of executing, processing and accounting for transactions is still blurred. The solution may yet be within arms reach. Some of the proposals for standardization or the middleware approaches have valid arguments. The organizations that can achieve this will be able to succeed in market transparency, elimination of human intervention, and increased productivity for all.
Works Cited.
McCormick, Fritz. “XML and the Securities Industry” XML Conference & Exposition 2002 8-13 December 2002. Access date: 5/05/2006.
www.idealliance.org/papers/xml02/ dx_xml02/papers/03-04-03/03-04-03.pdf
Sandman, John. “Standards Convergence Still At Standoff” 03 October 2005. Access date: 5/05/2006.
http://www.securitiesindustry.com/article.cfm?articleid=16214&pg=ros
The Gale Group. “FIX usage to boom, providers battle to win model race, study says.” February 2006. Publisher: Euromoney Institutional Investor PLC.
The STP Forum. “FIX versus OMGEO debate Continues” 03 July 2003. Incisive Media Investments Ltd. 2006.
XML on Wall Street. “ISO 15022 XML” no Date provided. LightHouse Partners. Access date: 5/05/2006
http://lighthouse-partners.com/xml/proj_iso15022xml.htm
Statements from Ian Hoenisch (Chief Technology Officer and Senior Managing Director of ESP Technologies Inc) were taken from an interview at his office location in Nashua, NH.