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?
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.
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
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 email@example.com
specific to a particular asset class.