Amongst other things, Jack Welch is famous for having contributed a key nugget of advice to the business textbooks, recommending firms to ‘Change before you have to’, says Daniella Huggins, global marketing and communications manager at the newly renamed FIX Trading Community. In this blog she provides an overview of the FIX Protocol, the history of the former FIX Protocol Ltd (FPL) organisation and what the future holds for the new FIX Trading Community body and the changing financial markets which are evolving fast under regulatory and market forces.
In an industry that is constantly evolving, such as the securities market, staying one step ahead and taking note of Welch's wise words can prove highly advantageous. However, ensuring your business evolves so it can effectively manage and take advantage of the many issues, challenges and opportunities that today’s trading community must tackle, is a far from easy task.
Whilst it’s true to say that competition, innovation, changes in investors’ requirements, regulatory and political forces have all had an effect on the trading environment, rarely have they been quite so acute. Take the European markets as an example. Previously all eyes were predominantly focused on implementing the initial iteration of MiFID, however in recent years these same firms have needed to expand their focus and comprehend the implications of multiple new emerging regulations impacting various areas of the trade lifecycle and different asset classes.
Add to this an evolving market structure, advances in technology, the increased electrification of assets previously traded over voice, limited resources and investment following the financial crisis and fundamental shifts taking place in the way business is performed. As a result, it is not surprising that trying to stay one step ahead or indeed just managing these great waves of change and their cost implications, can present huge issues to market participants.
One industry organisation focused on helping its members, and the wider industry, address these challenges is FIX Protocol Ltd. (FPL). Originally formed in 1998 to develop and promote adoption of the FIX messaging language, FPL provides a forum that brings together representatives from more than 275 of the world’s leading financial service companies. Its membership includes buy and sell-side firms, trading venues, vendors and regulators, and FPL encourages these firms to work collaboratively, free from commercial interest, to develop standardised solutions that prove beneficial for the wider community. FPL serves to support and enable its members, and the wider industry, as they make the necessary changes the pressures of the trading environment, regulators and technology advances demand.
Adoption of FIX
FIX has achieved wide industry adoption and is now used by thousands of firms every day to complete millions of trades. However, as the trading environment further evolves firms face fresh challenges and FPL continues working with market participants to help address these needs. For example, in June of this year, the organisation announced that it is further enhancing FIX to more effectively support the needs of trading venues and other high speed trading environments, enabling market participants connecting to these venues to benefit from more cost effective and efficient communications.
A further example of FPL’s continued efforts in this area comes from its work with regulators across multiple jurisdictions to promote the use of standards, such as FIX, so firms can leverage existing investments to meet new regulatory requirements and ultimately absorb the changes they represent into their business in a cost- and time-efficient manner. This drive to promote increased standardisation has led to FIX being used by regulators including ASIC for Short Sale Reporting, IIROC for Transaction Reporting, FINRA for TRACE Reporting, and the CFTC for Large Trader Reporting.
In recent years, as well as continuing to address the technical aspects of messaging standards, the organisation has increasingly focused on addressing the wider business challenges impacting multi-asset trading globally. This work has both widened the activity of the organisation and brought together industry experts who have shared knowledge and experience, critically enabling the membership to address business issues competently and with foresight. FPL has looked both at FIX and beyond, exploring other ways in which standardised best practices could effectively support these evolving needs and has achieved rather successful results.
FPL’s recent work with the buy-side community is a good example. Market developments, regulatory pressures and a desire for greater transparency were creating a need for the buy-side to look more closely at how their orders were being routed. FPL’s buy-side community were keen not only to gain more clarity, but also more consistency in execution reporting. To address this need, in 2012 FPL released the latest version of a set of guidelines designed to provide greater transparency for buy-side clients about where and how their orders are executed by their brokers.
The guidelines focus on requesting sell side firms to ‘tag’ their trades with specific details using FIX, so the buy-side can gain information such as on which venue or exchange the order was executed, whether it was executed passively by posting liquidity or aggressively by taking liquidity and whether the trade was done so on an agency or principal basis – all in a consistent format. These guidelines are now being successfully implemented by many sell-side firms. By gaining this information, the buy-side is now able to benefit from a more transparent view of how their orders have been worked and are able to make further strategic decisions based on this insight.
Another area in which FPL is now intrinsically active with wider business implications is risk management. As electronic trading products have continued to evolve and regulators across the globe are working to add additional controls to further protect the financial markets and increase investor confidence, FPL brought together business leaders from across the industry to drive efforts to help achieve these goals. Their work led to the production of a set of recommended pre-trade and intra-day risk controls for equity, futures and options trades. The recommendations were designed to provide brokers with practical guidelines that can be implemented into their electronic trading platforms to help reduce the chance of inadvertent errors, or flawed electronic orders, negatively impacting market stability.
One market that has possibly changed more than most in recent years is fixed income and FPL has played a key role in helping firms manage these changes. In 2011, as regulatory reforms in both the US and Europe were seeking to achieve greater market transparency by requiring most types of OTC derivatives to be cleared through clearing houses and traded on swaps execution facilities (SEFs), FPL was approached by a group of representatives from the sell-side community. These firms had borne witness to the many benefits that mass adoption of FIX had delivered to the equity markets and were keen to encourage both existing and new venues in this evolving market to also offer FIX, so they too could connect to these venues in a cost-effective and efficient manner.
With a global membership base spanning the trading spectrum, FPL was able to form a group to explore this issue that benefited from the participation of key stakeholders predominantly based in both the US and European regions, including trading venues, the sell-side firms that wished to connect to them and the buy-side. Through this group, last year FPL released recommended best practices for how SEFs could trade interest rate swaps (IRS) and credit default swaps (CDS) using FIX.
The publication of these guidelines quickly proved very successful, with almost all of the SEFs aiming to launch in 2013 planning to do so offering FIX connectivity. Once the swaps work was complete, the group then turned its attention to the traditionally voice-traded cash bond markets that were also quickly becoming electronic and earlier this year released recommendations for how cash bonds could also be traded using FIX. This initiative is now also showing similar success traits and generating significant interest in being adopted.
An evolving organisation
These are just some examples of the many different ways in which FPL is working with its members to address the multitude of business and regulatory challenges impacting the trading community.
When the organisation was launched 15 years ago, the name FIX Protocol Ltd was selected. At this time the organisation was only looking at FIX, however, FPL’s remit is much wider today. It has evolved to meet the changes taking place in the market it was developed to support, and its leaders no longer feel this name is an accurate reflection of the important role this vibrant member-led community is playing in today’s trading environment.
As such, this week the organisation is pleased to announce its new name ‘FIX Trading Community’, a name selected to reflect the fact that the organisation is fundamentally focused on bringing people from across the FIX community together to solve industry challenges through standardisation.
The organisation is ultimately focused on working with its members to improve the global trading process and if recent years are anything to go by, the pace of change is unlikely to slow. FIX Trading Community will continue supporting its members whatever these changes may be, working with the FIX trading community to address these challenges so they can change (for the better) before they have to.