STP in the Bond Market? Not Yet, But Electronic Initiatives Are Gearing Up
The Bond Market Association plans to build a standard-messaging hub and launch an all-inclusive version of FIX, as part of an effort to bring straight-through processing to the fixed-income community.
Like Dr. Evil of Austin Powers fame, it just won't go away. Straight-through processing, one of the most overused securities industry catch-phrases, is back in the spotlight. But just as Dr. Evil's character morphed in the latest 007 spoof, the current STP hype comes with a twist.
Historically, STP - a process that calls for the complete, front-to-back automation of the trading cycle - has been tied primarily to equity- and foreign-exchange trading firms. Most recently, however, the fixed-income community has thrown its hat into the STP ring.
Bond dealers, unquestionably, have been slower to embrace electronic trading than their securities counterparts - especially in the equity realm. So, logically, you may ask, are fixed-income dealers anywhere near achieving the holy grail of electronic trading, automating everything from indications of interest to trade settlement? The answer is a resounding no. In fact, many small to mid sized fixed-income brokerage firms still execute the majority of their trades via either phone or fax.
But the Bond Market Association - an industry trade group that represents the interests of primary dealers spread across the diverse fixed-income spectrum - is working on a series of electronic initiatives designed to move firms closer to STP. The BMA, in pursuit of STP, is trying to develop a netting process that will enable both sell side and buy side firms to clear more transactions as profits, and is considering building a middle-office utility that would serve as the central reservoir for all industry exceptions. However, those initiatives don't rank as high in priority as the association's two most ambitious projects: the development of a standard-messaging hub and the release of an advanced fixed-income version of the FIX-messaging protocol.
MESSAGING HUB: SIMPLIFYING THE ROUTE TO VMUS AND ATSES
One of the ways the BMA is trying to automate the trading cycle for bond dealers is via the development of a standard messaging hub. Today, in order to send trade messages to every firm it transacts with, a dealer must build interfaces to multiple fixed-income alternative-trading systems (ATSes) and virtual-matching utilities (VMUs).
For the purposes of communicating with their clients, ATSes - like TradeWeb - and VMUs - such as Omgeo and the Global Straight Through Processing Association - have each built their own application-programming interfaces.
But the BMA, led by its STP steering committee, wants to develop a standard hub, through which trade messages can be sent to every ATS and VMU.
Peter J. Murray, chairman of the STP steering committee and the managing director of the Americas operations at Credit Suisse First Boston, says that such a hub should yield valuable cost savings to bond dealers.
"The VMUs are all building their own separate technology and functionality. So, from the dealer side, we now have to communicate with each one of these platforms," he explains.
"Then you have the ATSes that are out there, that are building the same functionality as the VMUs in a lot of cases. And today we have to build an interface with each different ATS that comes along. (Moreover), there are three or four firms in Europe that are looking at building a VMU, and we'd have to interface with each one of those ... . But this messaging hub would allow (dealers) to communicate to one place, and then that messaging hub would send the trade messages out to the appropriate VMU or ATS."
Though the messaging-hub initiative is still in its early stages, the BMA has formed a subcommittee that is focused exclusively on this project. That subcommittee, says Murray, will "probably" send out a request-for-proposal "to various different vendors," in an effort to find someone to develop the technology for the hub.
After the BMA selects a vendor to oversee the development of the messaging hub, it must decide exactly when the platform will go live. Right now, Murray says, the BMA is targeting the third or fourth quarter of 2003 for the launch of the hub - but that could change if any matching or execution vendors decide to postpone their rollouts.
In addition to not having a specific date for the launch of the hub, the source of the funding remains unclear. Though it's possible that capital will come solely from bond dealers, the BMA may also seek funding from other segments of the fixed-income community.
Joseph Sack, a BMA executive vice president, says the messaging-hub effort is part of a larger shift in the bond industry. Up until recently, he says, fixed-income firms were focused on T+1, a project that calls for firms to achieve next day settlement of trades. But since the T+1 deadline in the United States has been pushed back to 2005, the bond community, says Sack, has put T+1 on the backburner, and refocused its energy on STP. "We definitely want to achieve automated allocations, and we want to achieve matching of block trades on almost an immediate basis," he says.
FIX 4.4 FOR BONDS ON HORIZON, BUT WILL ANYONE ADOPT IT?
The development of a standard-communications protocol - that will enable buy-side and sell-side fixed-income firms to talk to each other - is another critical element of the BMA's quest for STP. "Right now, everybody has their own standard formats of how they communicate with each other, and one of the things that we firmly believe is that we need to build a standard-communication module and protocol," says Dexter Senft, a managing director at Lehman Brothers and the co-chairman of the BMA's protocol/standards committee.
To achieve that goal, the BMA is planning to release FIX 4.4 - an advanced version of the FIX-communications protocol that covers nine different bond instruments - in the first quarter of 2003. FIX 4.4, says Senft, will offer "complete support for fixed-income transactions," from indications of interest all the way up to allocations. It will also cover virtually all of the bonds traded online, including U.S. treasuries, corporates, municipals, mortgage-backed TBAs, commercial paper, repos and European corporates and governments.
Since March of 2000, when the BMA began its pursuit of a bond version of FIX, the association has gone through four different versions of the protocol. But Senft says that the BMA has teamed up with FIX Protocol Ltd. - its development partner - to build a version of FIX that easily outclasses all of the previous versions, in terms of product range and functionality. FIX 4.4, he says, will have nearly everything a fixed-income firm could want, but he still expects sale of this advanced communications protocol to be a "big challenge."
In the bond world, Senft says, it often "takes a long time" for firms to adopt new releases of FIX. Indeed, he says, many fixed-income firms are still running FIX 4.0, which the BMA rolled out back in the spring of 2000. "Most of the installed FIX base ... tends to be happy enough with what they have," he says. "So it's exactly like asking the question, if I'm Bill Gates, how do I get people to switch to XP? How do I make my operating system compelling enough to get people to throw out Windows 98 ... and switch over?"
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