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Fixed Income?
 Can FIX do for fixed income
 what it’s done for equities
 While the influence of FIX has spread rapidly in global
 equity trading markets, its role in broader asset classes
 has been less vociferous. FIXGlobal asked market
 leaders, MarketAxess, TradeWeb and Fidessa LatentZero for
 their views on the impact of FIX in the fixed income arena.

                                                                        FIXGlobal: FIX4.4 was introduced back
                                                                        in 2003 as a version that provided strong
                                                                        support for fixed income trading. How
                                                                        successful do you feel 4.4 has been?

                                                                        Bill Hayden (TradeWeb):       The adoption of
                                                                        FIX 4.4 was slow at first as people jerry-
                                                                        rigged their existing FIX 4.2 engines to
                                                                        handle data for fixed income securities.
                                                                        Over time, however, firms began to address
                                                                        issues such as support and scalability and it
                                                                        became obvious that using FIX 4.2 for fixed
                                                                        income was no longer desirable.

                                                                        The big wave of adoption for 4.4 came as
                                                                        clients gradually upgraded or replaced their
By Bill Hayden,   Tradeweb     By Nick Themelis,                        FIX engines. In many cases this was a result
                               Chief Information Officer, MarketAxess   of an upgrade or replacement of an existing
                                                                        order management system.

                                             Hayden: In the current climate, the adage          have supported CDS etrading since 2005
                                             of “if it ain’t broke, don’t fix it” takes hold.   and continue to offer the technology and
                                             Firms are not able to make strategic               access to liquidity for credit etrading.
                                             upgrades and are instead forced to switch
                                             into a mentality where the primary goal is to      FIXGlobal: The US has a much more
                                             keep the lights on.                                diverse range of fixed asset types than
                                                                                                elsewhere in the world, and is typically an
                                             Another reason that the protocol has not           over-the-counter (OTC) market. However,
                                             reached a one hundred percent adoption             some asset types are being offered in a
                                             rate is that in many cases fixed income            centralized exchange market, such as the
                                             takes a back seat to equities. If a firm is        NYSE bond market. Do you see this trend

                                                            If we have learned anything in
                                                          the recent credit crunch it is the
                                                        importance of the over-the-counter
                                                          market as credit becomes tight.

                                             using FIX 4.2 for its equity business then         towards a centralized market as a way to
                                             they might not see the incentive to upgrade        achieve greater price transparency in the
                                             to 4.4 if the volume of fixed income is small.     current US economic situation?

                                             Themelis: There is nothing technical or            Hayden: The primary transaction venue for
                                             conceptual that prevents the fixed income          client-to-dealer fixed income and derivatives
                                             community from adopting FIX Protocol.              trading is likely to remain in the OTC space
                                             There was a legacy investment in proprietary       for the foreseeable future. If we have learned
                                             protocols in the early days of fixed income        anything in the recent credit crunch it is the
                                             etrading, however as automated trading             importance of the over-the-counter market
                                             increases, clients are looking to take             as credit becomes tight. The primary dealers
                                             advantage of more efficient, more reliable         play an invaluable in creating liquidity, which
                                             connectivity technology.                           leads to lower costs for clients.

Nick Themelis (MarketAxess):                 Many leading STP tools now support FIX 4.4,        The issue of market transparency is also an
FIX 4.4 was developed to provide real-       allowing for fully electronic interaction across   important driver for the continued role of
time, counterparty connectivity for the      all functions. Pre- and post-trade processes       the OTC model. Due to the very large size
fixed income community and, since its        such as order creation, negotiation and            of trades, the buy side is very reluctant to
inception, we have seen strong interest      trade allocations and settlement can now be        show their positions in an open exchange.
from the buy-side community. For             fully automated.
example, 63% of our connected clients                                                           Themelis: Fixed income is best suited by
access our platform via FIX. We have         Additionally, there are automated, reliable        electronic trading protocols that emulate
built partnerships with OMS vendors who      tools available for market participants            an OTC market, such as our request-for-
use FIX connectivity for their operations,   to get onboard and easily overcome any             quote client-to-multi-dealer trading system.
which has further expanded FIX adoption      barriers to entry such as cost or technology       The credit market is not well suited to the
for the buy-side community. We’ve also       development. Greenline’s suite of FIX              exchange trading protocol that we see in the
seen several fixed income ECNs use FIX       Protocol solutions and services are designed       equities market where there are continuous
connectivity.                                to ease the FIX adoption process for clients       two-sided markets all day long.
                                             looking to update their legacy systems.
FIXGlobal: Where the protocol has not                                                           Furthermore, a trading platform that
been widely adopted, do you feel its been    There is growing interest in messaging             disintermediates dealers and their liquidity
limited by technical strengths or by other   standards like FIX 5.0 for structured              from their clients is not suited to the market
business environment issues?                 products such as credit default swaps. We          structure right now. The advent of TRACE

                                               brought much needed liquidity to the fixed     risk management program, additional
                                               income community. The new dealers include      analysis is ultimately required to derive risk
                                               independent broker-dealer firms, as well as    management metrics such as duration and
                                               dealer subsidiaries of regional banks.         credit ratings.

                                                                  We see increased activity
                                                             in the retail sector as clients and
                                                                regional broker-dealers look
                                                                for new sources of liquidity.

                                               FIXGlobal: A tremendous focus has been         FIXGlobal: Central clearing is seen with
                                               placed on counterparty risk management         a competitive eye by firms such as
                                               since the collapse, or mergers, over the       NASDAQ (NCC initiative), LCH and Chi-X
                                               past year of some blue chip financial          and EuroClear. What is the impact on
                                               firms. Real-time position keeping has          international fixed income trading, and
                                               been of particular interest. Do you            what business and technology challenges
                                               feel there is a place for FIX in this risk     are firms being forced to address?
                                               management process?
reporting has probably had the greatest                                                       Hayden: We view central clearing as being
effect on increasing transparency in the US    Hayden: I think it depends on your             complementary to electronic trading. Our
for corporate bonds.                           view of what FIX is. If you see FIX as         firm is agnostic to the central party; rather
                                               a communication tool between two               we look to work with each of them. We feel
FIXGlobal: Where do you see the retail         counterparties then I don’t see FIX being      that the benefits of electronic execution
fixed income space relative to the             implemented for these purposes. If,            (speed of execution, price discovery,
institutional side? With more and more         however, you use FIX internally to connect     STP) can be even further enhanced by an
retail-sized clients looking for safe          your various systems such as trading and       electronic link to a central counterparty.
returns by in municipal, corporate and         risk management , then the protocol could
TIPS bonds, are your firms working             be important. In the latter, risk management   There are technical hurdles that must be
to automate between retail and fixed           systems can use the FIX to convey position     addressed with OTC derivatives. FpML has
income?                                        and credit information between internal        been the defacto standard for derivatives
                                               systems. To this extent it could help          messaging. However, up to now, it
Hayden: After eight years of operating in      customers to manage their counterparty         has only been used in the post-trade
the instructional dealer to client space, we   credit. This will be even more important       space. Tradeweb has embraced FpML in
launched our Tradeweb Retail platform at       as companies outsource parts of their          post trade, bringing it into the FIX Execution
the end of 2006. The requirements of retail    processes to third party applications that     Report message. There are still gaps in
investors are very different and the system    need to interact.                              coverage with regard to the pre-trade and
addresses these needs. From day one the                                                       trade arena.
retail platform has embraced the use of FIX    Themelis: Fixed income securities that trade
4.4. In fact, because of the large number of   electronically on platforms such as ours       Themelis: There is potential for the FIX
smaller trades, straight through processing    help clients update their trading positions    protocol to develop messaging standards
is arguably more important in retail than      more quickly. In the case of corporate bond    for central clearing activities. Incumbents
institutional.                                 etrading, executed prices are reported to      such as the DTCC are facing new entrants
                                               TRACE in real-time.                            into the clearing space as the popularity of
Themelis: We see increased activity in                                                        credit derivatives is driving the proliferation
the retail sector as clients and regional      MarketAxess’ BondTicker data service           of clearing opportunities.
broker-dealers look for new sources of         incorporates TRACE data into our trading
liquidity. We’ve responded to this demand      platform to provide real-time corporate        MarketAxess supports initiatives that
by incorporating regional dealers onto         bond pricing. Investor clients can use         increase transparency and efficiency within
our trading platform. Regional dealers are     this corporate bond pricing service to run     the credit markets. Central clearing will
typically focused on smaller trade sizes       proprietary risk analysis programs. While      significant reduce counterparty risk, thereby
and their participation on the platform has    we offer FIX feeds for our data into any       contributing to a more sound credit market.


FIDESSA LatentZero
join the debate with
a different perspective…
Message formats and infrastructure that serve and
support cash payments have been very successful. Do you
think the market is becoming more motivated to reduce
communications costs where real money is not involved?

David Blocker (Fidessa LatentZero): No. The market, like any
other, is motivated by cash control and real, verified savings.
Fixed income products trade either short term or long term.

Short term is dominated by new issues where the investor deals
directly with qualified institutional borrowers. The long term
is dominated by OTC and secondary markets, where there is
                                                                     By David Blocker, Fidessa LatentZero,
great variation in the packaging, distribution and consumption       Fixed Income Product Strategist
of securities. This business is still ‘manual’, conducted over the
telephone, and it requires greater effort from operational, legal
and management viewpoints. Consequently it will continue to be       A well constructed structure, that bears similarity in language
driven by cash protection and preservation.                          and logic to market documentation, trading terminology and
                                                                     events that create messaging content, should be able to suit
The market is also being driven by the need for hard and fast        cross-asset classes and their events as they develop.
processing-cost reductions. Deploying messaging without an eye
toward real costs is not beneficial, either from a business or a     FIX has had very active participation from its user
technical standpoint.                                                community. Is this a sign that, when it comes to anything
                                                                     highly interpretive, technical and complex, a large group
Fixed income data is significantly more complex than                 of users are the last people who should be involved in the
equity data. Do you think the FIX working groups have                solution?
the experience to deal with fixed income instruments and
workflows?                                                           Blocker: Probably. A small team of practitioners could
                                                                     probably distil a messaging solution from readily available
Blocker: The FIX group has been working on fixed income              special interest group publications (SIMFA, ISDA, etc) following
trading since at least FIX4.2. The FIX message tags have             their regulations and standard practices.
gradually been expanded to cater for fixed income specific
instrument definition fields and RFQ trading workflows.              That might create a product with greater utility, breadth
                                                                     and acceptance. It appears from existing FIX participant
This has been an evolutionary strategy and this can be seen          interactions that the target deliverable doesn’t actually conform
in the relatively low volume of fixed income trades currently        to any specific market or practice. It risks becoming a “common
processed via FIX. It seems there are significant differences in     denominator” with limited benefit except to those with the
focus between the sell-side (which concentrates on instrument        time, energy and financial resources to drive the product
structures) and the buy-side (which concentrates on trading          towards their own particular way of conducting their business.
workflows). It might be prudent to separate these two client
bases and business disciplines.

Has FIX gone down an equity path that may never work for
fixed income?

Although evidence suggests that software that works for
                                                                                             Any thoughts on this or other articles?
one asset class doesn’t work for other, the substance of the                                 Please send any comments,
messaging infrastructure does not necessarily follow a format                                refering to this article as Vol 2 Issue 11 AM 1,
                                                                                             direct to
specific to a particular asset class.


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