Last week at the FIX Trading Community’s Americas Trading Briefing in Boston, broker-dealers, asset managers and vendors came together at an event hosted by State Street Global Markets to discuss key issues facing the financial services industry. Three panels convened, with topics ranging from the rise of outsourced trading to the FIX protocol’s role in post-trade processes.
Attendees left with a number of takeaways, but perhaps none more important than this: when it comes to both the FIX protocol and the trading landscape in general, change is the only constant.
The recent surge in demand for outsourced trading solutions is a textbook example of buy-side behaviors adapting to new regulatory and technological realities. For asset managers, it has become increasingly expensive to stay in business; MiFID II compliance, costly trading tools and rapidly falling commissions are three of the primary culprits. As a result, buy-side firms are taking a hard look at their internal processes and making tough decisions as to which ones are worth keeping in-house.
Amid this tumult, outsourced trading has emerged as a popular solution. Once seen as a niche service for smaller funds that often lack the resources to run their own trading desks, buy-side firms of all sizes are now leveraging this model to drive a wide variety of efficiencies.
Importantly, the buy-side client retains a lot of freedom over their allocations when working with an outsourced trading firm. Firms may choose to outsource in order to gain access to a particular region, or in a particular asset class. They can also choose to outsource as much or as little of their trading activity as they want; one panelist noted that the vast majority of outsourced trading clients choose to outsource less than one third of their trading. The model is no longer just a stopgap for fledgling funds, but a long-term solution for the buy-side, which has been hit hard by shrinking budgets.
Of course, there can be no disruption without a little anxiety. Some are concerned that this trend will accelerate the existing decrease in the number of seats on buy-side trading desks. Others worry that the process is too anonymized, as there are certain cases where the executing broker does not know the identity of the outsourced trading firm’s underlying client; one panelist suggested that this could be an area in need of clearer industry standards or even regulation.
Overall, though, there is a lot of excitement around outsourced trading. Leaning on these providers is one way that funds can keep their investors happy and demonstrate the versatile nature of their industry.
The FIX protocol has also experienced a number of significant shifts in recent years. Much like outsourced trading, the FIX protocol has functionalities that have been around for a while but are nevertheless undergoing significant transformation.
One of these is the FIX Algorithmic Trading Definition Language, or FIXadtl, which solves a longstanding pain point for the buy-side. With the rise of electronic trading, brokers have been able to offer buy-side firms direct access to their algorithmic trading strategies. This was a powerful development when it first came to market, but it has caused headaches among funds for two main reasons. First, each sell-side strategy has its own parameters, resulting in long and complex combinations of FIX tags, and second, each sell-side firm has a specific way they want their algorithms to be displayed on the buy-side OMS, requiring extensive development and testing.
Enter FIXadtl. Originally released in 2010, the standard enables algorithmic strategy providers to release specifications to clients in a computer-readable XML format, just as web browsers can read HTML. The information can then be processed by the OMS to satisfy brokers with much greater ease and efficiency.
While there has always been broad agreement on the buy side as to the need for a function like FIXadtl, it has recently come into more widespread use as more vendors are realizing the benefits. In addition, there are plans for a Version 1.2, which will focus on functionality for items such as clock controls, grid orientation, multi-leg order types and new filtering abilities to allow broker-dealers to better manage their FIXadtl files.
Then there’s FIX Orchestra, which seeks to take rules of engagement documents, which are traditionally produced in Word or PDF format, and enable machine-readable ROE for an individual firms’ FIX specification. This helps to reduce time to onboard counterparties and improve accuracy of implementations. Distinct from FIXadtl, this is another initiative geared towards streamlining processes and decreasing time to market, which helps the entire industry. One panelist noted that Orchestra is currently taking recommended practices documents from various FIX working groups and will put those workflows into Orchestra so that there is a corresponding machine-readable file for each one.
Finally, there’s the matter of the post-trade, where ancient technologies – faxes, PDFs and the like –
maintain a strong presence. While FIX is the industry standard for front-office communication, the back office is the protocol’s white whale, and there was much discussion around how to change that.
One panelist noted that the industry suffers from a lack of front-to-back integration. With FIX tags, data is pushed from front to back office. FIX also helps to streamline flows in middle and back offices, reducing the number of people needed to support these operations.
Another panelist suggested there is an education issue — while traders and other front office staff are very comfortable with FIX, many back office staff are not up to speed and would benefit from continued conversations around the topic. The panelist compared post-trade to the oil industry: both are set in their ways, but through technology — FIX and fracking, respectively — firms are able to achieve results with greater efficiency and creativity. In this fast-paced industry, firms want to hear that their current technology setup is optimal, said one panelist, but this is unrealistic. While a back-office revolution may not happen overnight, firms can take incremental steps such as training operations staff in an effort to make the FIX protocol standard work in every step of the trade lifecycle.
Ultimately, that’s a lesson we can all learn. There is so much innovation occurring today, and it can feel frustrating when the industry doesn’t adopt new functionalities as quickly or optimally as we’d like. Cutting across various disciplines and concerns of the financial industry, an event like the Americas Trading Briefing is an ideal opportunity to take a wider view and think about just how far our processes and practices have come over the past decade.
