FIXing Fixed Income

Some would say the old adage, "If it ain't broke don't FIX it," is very apropos to the bond markets today. Many industry players have resisted its automation, but the the February launch of FIX 4.4, which heavily focuses on fixed income, will likely put an end to these naysayers.

At a recent conference in London, which focused on automation of the bond markets, one speaker likened the adoption of FIX to the development of the M25 - the heavily trafficked highway that circles London. He asked members of the audience to raise their hands if they had ever used the M25 - as expected, every hand was raised. Even I, being from the U.S., had my hand raised. He then asked, who remembered a time before the M25? Most hands, although the audience was old enough to remember, remained down. Slowly some hands started to go up as if they really had to think about that time which seemed as if it never existed.

The highway was completed in 1986, and special incentives and obscure rules had to be put in place to force its use. It was a tough transition then, but now it has become so mainstream that it's hard to remember a time before it. No one would have said the system didn't work before the highway was built - people got to where they were going in the way they were accustomed, not realizing there was a faster, more efficient, maybe even cheaper way to get from point A to point B.

The same can be said for FIX in fixed income, derivatives and options - markets that are next in line for adoption.

The challenge will be getting institutions to change a process they are comfortable with. Arguments have been made that volumes are not high enough in the fixed-income markets to justify a major process change. FIX saved money in the equities markets largely due to scale.

However, one advocate, Terri Humphreys, head of market operations at Baring Asset Management in the United Kingdom, says in an environment where the quest for cost savings is rampant, automating the bond markets is an area where savings can be found. She says the cost of a buy-side fixed-income trade is 2.5 times that of an equity trade - a statistic that offers enough proof to move forward.

With the new openness of Fixed Protocol Limited (see cover story), and the advocacy from the Bond Market Association, I am certain that, in time, the industry will struggle to remember a time before FIX - and, although not broken, all will agree that the fixed-income markets were in need of this very important FIX.