DWT Gives FIX a Reality Check

- WatersTechnology Staff
- 05 Dec 2005

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DWT
's editor Eugene Grygo has asked FIX market participants to chime in on the history, current state and future of the Financial Information Exchange (FIX) protocol, a key component of standardized electronic trading. The 11 respondents—in alphabetical order according to their company names—are: Sang Lee, co-founder and managing partner of market research firm Aite Group; Chris Biscoe, head of U.S. e-commerce at Barclays Capital, New York; David Sawyer, director of financial protocols and application services at BT Radianz; Octavio Marenzi, founder and CEO of market researcher Celent Communications; Damon Kovelsky, a senior analyst with Financial Insights; Courtney Doyle, head of industry practices at consultancy Jordan & Jordan in New York, home of the FIX Protocol Ltd. (FPL); Lee Cutrone, managing director, industry relations at Omgeo; Ary Khatchikian, president and co-founder of automated portfolio trading software vendor Portware; Andrew Douglas, program manager for securities industry regulatory initiatives for Swift; Peter Delano, senior analyst at market research company TowerGroup in Boston; and Jean-Cedric Jollant, managing director, North America for FIX systems vendor Ullink. 1.) What are the major forces that have put FIX on a path to ubiquity?
BISCOE:
In the beginning, FIX gained critical mass because of the influence of its earliest members, like Fidelity, and the strength of the electronic trading message. Fidelity's message to the sell side provided enough of a compelling argument for the largest, most well-capitalized brokers to support the initiative. Once the brokers had made the initial investment, they became the chief catalysts for driving the industry to greater adoption. Eventually, client pressure, common sense and a desire to lower operating costs became a tipping point triumvirate that made FIX's ubiquity inevitable.
KHATCHIKIAN:
The key factor in the growth and widespread acceptance of FIX has been the concerted effort put forth by so many different parties—banks, brokerages, vendors, etc.—across the global financial marketplace. Led by FPL, this effort has been unprecedented in its scope and involvement of so many different interest groups. LEE:
I believe the rapid expansion of electronic trading in the equities mar ket has propelled the mass adoption of FIX. ... Finally, the availability of cost-effective FIX engines has played an im por tant role.
DOUGLAS:
FIX is still far from ubiquitous outside of the U.S. FIX provides a flexible mechanism to handle the growth in trading volumes, with the consequent increase in the level of electronic trading that results from this. Much electronic trading remains proprietary, however.
CUTRONE:
… The electronic trading revolution in the equities markets has been a boon for FIX, in particular, due to its broad usage by major firms for electronic order/entry communications. From there, it was only logical to try and extend the usage of FIX to other instruments.
DELANO:
... More recently, best execution regulations in the U.S. and Europe, and internal control provisions of Sarbanes-Oxley in the U.S., have driven institutions to consider a FIX implementation as a way to monitor trading more effectively.
2.) Has the push for cross-asset trading given new life to FIX?
SAWYER:
Absolutely. The rise of hedge funds is driving high-speed automated trading across assets, and the hedge funds fully understand the pure trading value of a standardized protocol across assets as well as across borders. MARENZI:
Not just yet. FIX's major emphasis is, and continues to be, in the equities arena. Non-equities implementations of FIX are few and far between.
DOYLE:
Cross-asset trading strategies have centralized responsibility for execution, and disparities across markets and asset classes—in terms of market practices—are coming into alignment as a result. FIX is the enabler. FIX will prosper and thrive with more markets shifting more of the trading life cycle to an electronic solution.
DELANO:
The use of traders to handle multiple asset classes simultaneously is relatively limited in the industry. In our view, the ability to use FIX for different asset classes has had a bigger impact on FIX adoption. Trading desks for derivatives, foreign exchange (FX), and fixed income can now benefit from the speed of electronic trading by using version FIX 4.4. 3.) FIX engines are becoming commoditized. How will the FIX engine vendors survive?
BISCOE:
While there are cheap, and even free, ways to do FIX message translation, the key to success is still very much driven by implementation, performance and service. Going forward, the FIX vendors will be able to differentiate themselves by how much they can promote and support their customers' multi-asset class vision, as well as their ability to become meaningful consultants to their customers' overall electronic trading needs.
KOVELSKY:
The only way for these vendors to survive is expanding outside of just being a FIX engine. … The more likely scenario will be finding a buyer, such as an order management system (OMS) vendor, who has no embedded FIX engine or a weak one.
KHATCHIKIAN:
FIX engine vendors have plenty of opportunities to remain relevant. One of these is the need to support FIX-to-exchange connectivity. As prevalent as FIX is in the marketplace, many of the global exchanges still don't support it. Vendors can step up by building adapters and gateways to these exchanges. They can also create new business for themselves by managing FIX networks and supporting advancements in market data transmission such as the FAST protocol.
LEE:
FIX engines have indeed become commoditized. Most order management systems, for example, come with their own integrated FIX engines nowadays. I believe that standalone FIX engine providers are facing tough prospects for their survival in the future.
DOUGLAS:
Going forward, there will be fewer providers, and they will have to diversify their offerings. Some are already doing that by providing specialized services such as testing and analytics as part of their offerings. Others are getting involved with network providers to build communities of users on hubs.
JOLLANT:
... FIX engines are back where they belong: connectivity pipework.
4.) FIX is gaining ground in instruments beyond equities. How would you characterize this trend—is it good or bad for the industry?
KOVELSKY:
Unless traders in other asset classes come up with their own protocol and are able to make it successful in a short period of time, FIX will become the standard for non-equity trading. If FIX is able to push farther into the middle and back office in those asset classes, this will allow firms to decrease some operational costs, as there could be a single standard coming in from the front office, decreasing integration errors and costs.
DOYLE:
Clearly, the greater use of FIX to cover more asset classes is a benefit to the industry. Jordan & Jordan had done a study a few years back and, based on feedback from industry contacts, we recommended that the [FPL] create two additional product committees—at the time, Global Fixed Income and Global Derivatives. There has been a Global Foreign Exchange Committee created since. If efficiency is good, then yes, it is good for the industry.
LEE:
Any time you can provide a certain level of standardization into a marketplace that lacks a common communication protocol, the industry can begin to work toward establishing transparent operational procedures that will only help in terms of creating great market transparency and minimizing chances for processing errors.
CUTRONE:
Standards are good for the industry to the extent that they truly reflect industry practices and do not result in fragmentation. A number of in stru ments, such as some of the more common derivatives contracts, have existing message types and electronic systems in place that work very well. In other areas, there is room for new entrants like FIX to play a larger role. In addition, FIX is still largely a front-office phenomenon at the moment. For example, only three percent of equities allocations are currently done using FIX. The common thread here is: If it's not broken, don't FIX it.
DELANO:
The good news is that the sell side can realize additional operational efficiencies. The bad news is that as FIX becomes more widespread, the availability of counterparties over FIX networks increases the competition for order flow.
5.) What problems are caused by the variety of FIX versions out there?
SAWYER:
Different versions of FIX break the value of a standard, open protocol. Certification and testing become much more time-consuming and expensive. The temptation to try and provide backward compatibility and translation across versions is great—and is fraught with danger. In addition, the effort spent by different firms to solve similar business problems by creating new FIX dialects is a duplicated and somewhat wasted effort.
DOUGLAS:
There is no migration path to the latest version of FIX, and the reality is that multiple versions of FIX are in use at any given time—FIX 4.0, which came out in 1997, is still very widely used. This makes standardization of communications much harder to achieve and does lead to operational overheads. JOLLANT:
Besides technical problems linked to protocol normalization, we see lots of hybrid versions of FIX with mixed tags or values 'borrowed' from one version to another. Custom implementations of FIX are challenging the core business of software vendors. 6.) Will the differences among the versions of FIX in the market become more acute as the use of FIX increases?
SAWYER:
No, each version of FIX will continue to sweep up the new dialects and standardize going forward.
KHATCHIKIAN:
Yes, they will. Because of the widespread adoption of the protocol, FIX is now at such a high level of maturity that firms migrate to newer versions much more rapidly than they have in the past, thereby significantly reducing the 'version gap' between firms.
KOVELSKY:
This has been an ongoing debate with the FIX community for many years now, and many people have expected that FIX will evolve to a number of proprietary protocols that have some superficial resemblances. It has not happened yet, mainly due to users of FIX being aware of this danger and taking precautionary steps. As long as FIX allows for user-defined fields, this will always be a problem, and it remains the responsibility of users to prevent it. To date, the market-based approach of seeking mutual compatibility between users of FIX has been successful.
DOYLE:
The differences among the versions of FIX are laid out in the FIX functionality matrix, which was created by one of the FPL's committees this year and is a great visual picture of the distinct versions of FIX and the expansion of the protocol across asset classes (http://www.fixprotocol.org/functionality). JOLLANT:
Despite a strong equities-based population using pre-4.2 versions, I believe that advanced ser vices—post-trade and cross-asset class trading—will drive the market toward fewer versions of the protocol. However, the market is evolving toward a multi-headed FIX engine able to accommodate all flavors of the protocol. Old FIX engines still have solid years in front of them.
7.) What, if any, are the major drawbacks to the widespread use of FIX?
DOUGLAS:
The drawbacks are all related to the fact that FIX is out there in multiple versions and lacks a defined program to maintain interoperability to other data standards covering the rest of the transaction life-cycle.
JOLLANT:
Being FIX-compliant is void of real functional meaning. Cross-version compatibility can be tricky. The scope of FIX is getting so broad that a FIX engine could become a bottleneck.
SAWYER:
FIXML use is running a bit wild, and can give the appearance of offering the benefits of a standard open protocol while actually remaining fairly nonstandard.
BISCOE:
The biggest drawback is really for industry participants who have relied too much on inefficiencies in process—that is, on the order taking and administration—and not enough on value add:for example, on helping source liquidity or in interpreting significant price movements/events. For them, the transparency of FIX means that they are confronted with two choices: move up the value chain so that they can provide a greater level of value to the customer; or move to the Napa Valley and open a winery. Seriously, the industry is changing and the embrace of technology by the old guard has largely been exemplary, but the issue is no longer an 'if,' but much more a 'how soon?'8.) Exchanges are beginning to embrace FIX. What is holding back its acceptance among them?
LEE:
Exchange technology is old and often dominated by a handful of exchange technology providers that had traditionally pushed their own protocols. Most firms had to build a translator between FIX and exchange-specific protocols in the past. Of course, this added layer is now disappearing thanks to the rapid adoption of FIX among the major market participants.
BISCOE:
I would argue that the two biggest impediments to adopting FIX on the part of the exchanges has been legacy or competing infrastructure, and FIX's relative weakness in supporting market data. … Since FIX is on the cusp of solving the issue around market data with the Fast (FIX Adapted for Streaming) initiative, I would suggest that the convergence toward FIX on the part of the exchange is both healthy and inevitable
DOUGLAS:
Exchanges have their proprietary protocols that they prefer for commercial reasons, and because their systems are geared up to these protocols. Additionally, exchanges remain to be convinced that FIX is the right standard to handle high volumes—particularly in the area of pricing information.
MARENZI:
First, most exchange interfaces pre-date FIX. This means that broker-dealers already have the necessary interfaces to ex changes de veloped. While FIX is great for quickly deploying new interfaces, if I already have the interface in place, the value of replacing it with FIX is a bit limited. Secondly, there is a bit of visceral fear on the part of exchanges that if everyone uses FIX and can freely communicate order, trade and quote information with each other, the centralizing role played by the exchange may become obsolete. Basically, the question becomes, in a world where everyone can communicate with everyone else on a point-to-point basis using FIX, why is there a need for an exchange at all? DELANO:
Until market participants demand it, exchanges will be resistant to change. TowerGroup sees a direct correlation between the use of FIX by buy- and sell-side participants and the demand for adoption of FIX by exchanges. The growth in FIX usage in the next three years will come from trading in Europe and Asia, and move the exchanges in those markets away from proprietary messaging protocols.

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