FIX Opens Up the Inner Circle

Buy- and sell-side firms that are sending millions of Financial Information Exchange (FIX) messages around the world have invested substantial sums in technology to support the protocol - including order-management systems, FIX engines, monitoring tools, and network carriers that route message traffic.

"The FIX protocol has become a strategic part of firms' trading systems," says Scott Atwell, co-chair of the FIX Global Technical Committee.

Yet, for nearly 10 years since the creation of FIX - an open standard that provides real-time electronic-communication between buy- and sell-side-trading counterparts - in 1994 by an elite group of firms, vendors have been excluded from the organization.

Now the technology firms are being recruited to join the organization.

In a bold restructuring, FIX Protocol Limited (FPL) - the non-profit organization that operates the FIX protocol - began 2003 by opening up membership beyond buy-side institutions and sell-side dealers to include exchanges, alternative-trading systems, utilities and vendors.

"Historically, the FIX Protocol organization was viewed as an equity-centric, closed organization. This reorganization and membership drive looks to address those two views," says Michael O'Conor, co-chair of the Americas Committee and co-chair of the Global Reorg Committee.

Twenty nine new members - ranging from the New York Stock Exchange to online-bond-trading firms, such as MarketAxess and TradeWeb - have joined 45 existing members on board the organization that runs FIX.

At a crossroads, FPL seeks to retain the grass-roots nature of its all-volunteer-professional workforce, which has helped it become the global standard for equities trading, while expanding the protocol's usage beyond equities to other asset classes and other parts of the world.

The protocol is already expanding to fixed income and there is also serious interest from futures and options exchanges, as evidenced by the memberships from the Chicago Board Options Exchange, the Chicago Board Of Trade, the Chicago Mercantile Exchange and Euronext/London Financial Futures and Options Exchange.

Last June, FPL retained Jordan & Jordan, a management-consulting firm to the securities industry, to advise it on reorganization. FPL then hired the firm to run the FPL Program Office which signs up new recruits, assigns them to committees and also helps out with marketing and sales.

"It's really more of a company now," says Tom Jordan, chairman of Jordan & Jordan. "The entrepreneurial effort has done well, but now is the time to put a little structure to it and keep the enthusiasm and the drive of people that have brought it to where it is."

Why is FPL opening up the membership now? "We clearly wanted to demonstrate to the industry the value we place on the knowledge that is contained in all organizations that use and support the FIX protocol: the vendors, the exchanges, broader buy side, broader sell side," says O'Conor.

Others say that FPL simply needs more volunteers to take the protocol to the next level, especially as it juggles multiple initiatives. "Quite frankly, we needed to expand our membership base not just to raise more dues (but) to get more warm and capable bodies engaged and involved so that we could spread the load," says Atwell.

In what can only be seen as an indication that the demands on the organization are outgrowing its current structure, FPL plans to hire an executive director to promote the protocol and manage and coordinate activities for the organization. The executive director will, in turn, hire a staff.

To fund the new initiatives, FPL is charging membership fees - it costs $8,000 for firms to join one regional committee, $16,000 for two, and $24,000 for three, etc. Though buy- and sell-side firms always paid a fee, obviously the broader membership is a source of funds. What's new is a discount on the global membership: $25,000 entitles a firm to join three regional committees - Americas, European, and Asia-Pacific - in addition to two product committees - Global Fixed Income and Global Derivatives. Each of these committees will have three subcommittees under them: technical, education and marketing, and business practices. Members of those subcommittees will form the Global Technical Committee and the new Global Education and Marketing Committee.

While most of the buzz around FPL's restructuring centers on letting exchanges, alternative-trading systems and vendors join the organization and sit on its various committees, the organization also faces a number of challenges.

First and foremost of these is certification. The Global Steering Committee is revisiting a certification program for fixed income following an initiative in equities that stalled three years ago. It's also expanding the protocol to fixed income and global derivatives and it's pushing the protocol from the pre-trade-messaging area - where it dominates in indications of interest, orders and executions - into the post-trade world of allocation messages.

Opening Up the Membership: Admitting Vendors
When leading buy- and sell-side firms like Fidelity Investments and Salomon Smith Barney brainstormed with the likes of American Century and Goldman Sachs to create the FIX protocol in 1994, they set out to create a vendor-neutral language that could be downloaded from a Web site. A desire to remain independent and technology-neutral led to a decision to exclude vendors from participation.

"It was a bit frustrating that we couldn't sit at the table and help in the formulation of that because, at the end of the day, we became the folks that were implementing this stuff," says Bob Moitoso, senior vice president of Thomson Financial Banking & Brokerage. (Thomson operates TradeRoute, an order-routing network that supports FIX messages as well as AutEX, an indications-of-interest messaging service for equities and, more recently, fixed income.)

Vendors feel they have a lot to contribute. "We had been running hundreds, if not thousands, of connections for many years and, as the FIX protocol grew, they were about to encounter the kinds of problems we dealt with in our system," comments Tony Booth, director of connectivity, Thomson Financial Banking & Brokerage Europe.

"I think that's a fantastic idea," says Natasha Bonner, FIX project manager at Newton Investment Management, regarding the admission of vendors. A London-based fund-management subsidiary of Mellon Financial Corporation, Newton is installing Charles River Development's order-management system with a built-in Javelin FIX engine and plans to use FIX messaging in equities and, later, in fixed income.

"If we go with someone like CRD, who are developing the system, and if they're not close to the FIX committee, how are they supposed to know what the standards (are)? Picking a spec off the Internet is not good enough," asserts Bonner. If vendors get more actively involved in the FIX Committee, Bonner says, "They will end up making (fewer) mistakes and the newer versions coming out will be a lot cleaner," she says.

"What the vendors bring is the collective voice of the community and not the voice of the larger guys," says Moitoso, who contrasts this with the founding members of FIX - the 25 largest buy- and sell-side firms.

Previously, the only way vendors could participate was through the working groups on topics like fixed income, FIXML, or certification. But "vendors had no say in the direction of the organization or the development of the protocol," says O'Conor.

Under the new structure, "Any member that has joined is an equal member to all others that have joined the committee," says O'Conor. Vendors qualify to be nominated to head one of the committees and elections will be held in the next six or seven months, he notes. Each committee has one vote on the Global Steering Committee.

Now that the FIX organization has opened its doors to everyone, vendors are eagerly signing up. This concerns Sam Johnson, chief executive officer of TransactTools, who says there should be rules for active participation of members beyond just writing a check.

"I think there's a real tendency for vendors with big marketing budgets to just write the check to have their name on the list. If I'm a smaller vendor and it's a stretch for me to write that check and I'm dong it because I really want to play a role in the thing, then I want other people to be as committed as I am," he says.

Johnson - a former Goldman Sachs executive who was a founding member of the Global Technical Committee - supports the idea of opening up the membership and governance of the FIX organization to vendors, but is concerned about vendors becoming the majority on a committee, especially if they are deciding things like release schedules for the protocol.

"I would hate for a self-interested vendor community to hold up release schedules because of their own priorities," he says, noting that some vendors have lagged published versions of the protocol by as much as nine months. "You have to wonder if that's in the best interest of the protocol," he asks.

But O'Conor says there are checks and balances in place to prevent that scenario from happening. "Because FIX Protocol Limited is now such an open forum, if someone attempted that I think it would be fairly obvious that they were trying to do that and the membership would not allow it to occur."

A Central Certification Authority
Underscoring the challenges that FPL faces is the proliferation of multiple flavors of the FIX protocol, while buy-side firms might be using 4.0 or 4.1 in equities, sell-side firms are supporting 4.2. Not only are there multiple versions in use, 4.0 is most popular for equities, say vendors, but the implementation within a single version is open to interpretation.

"That's why people talk about FIX being so bifurcated or Balkanized, because everybody's got their own favorite version. Now those versions are (customized) a little bit more, especially on the equities side, and that's why the need for testing, activity analysis and monitoring is really important," says Fritz McCormick, an analyst covering electronic trading at Celent Communications.

Moitoso agrees, "It's difficult to certify when the protocol isn't nailed down.The flexibility of the protocol makes it much harder to have a certification process," he says.

An initiative to re-examine the feasibility of a FIX certification process for fixed income is being spearheaded by Daniel Doscas, who chairs the Global Fixed Income Committee. Right now, Doscas says the initiative is at an early "request-for-information stage" and vendors will be asked to make presentations to the Global Steering Committee in the March time frame.

"A centralized certification process, chartered by FPL, would be ideal," says Keith Jamaitis, chief operating officer, NYFIX USA. "That's something that we would look forward to. But certification is only as good as its enforceability," says Jamaitis, whose firm NYFIX/Javelin Technologies, operates an order-routing networks for FIX messages.

"If everyone had a plain vanilla - black or white - version of FIX implemented, it would make systems integration more plug and play," says Jamaitis. "There is a fair amount of dialect-ing within the FIX protocol where the certification process is a little bit ad-hoc from system to system," he adds.

A previous certification effort for equities called TradeAssure was attempted in 1999 which involved setting up a separate company through a vendor consortium. Two of the challenges that derailed that certification exercise were lack of funding and lack of agreement on the right way to certify, recalls Johnson.

But there is reason to believe that certification would work today. Now, FPL is collecting membership fees and there's been an explosion in the technology that supports the protocol, such as FIX engines, monitoring tools and order-routing networks.

"There's been some significant technological advancements in the last three years that might make certification a process that is more palatable. Also, fixed income is just getting started, and so it is easier to apply a certification process to something that is just getting started than it is to something that has been living and breathing for a number of years," says O'Conor.

Even though certification is being looked at for fixed income, O'Conor suggests it could be expanded to equities. "It's something we're going to review from the entire FIX Protocol Limited point of view. For the foreseeable future, there'll be a variety of versions of FIX being used and certification can play a part there." Celent's McCormick agrees. However, there is still debate over what form certification should take.

"There's a big difference between central-testing facilities and gold-seal-of-approval certification services," says Johnson.

Instead of inserting a central machine between FPL, vendors and users, so that everyone can test against it, he points to the success of electronic-communications networks (ECNs) doing independent peer-to-peer testing with their trading partners.

"I don't think you have to necessarily go all the way to call it certification, because I don't really think that's the spirit of FIX. People like the protocol because they can make it do what they want it to do."

Yet it's this ability that is "a doubled-edged sword."

Growth Opportunities: Fixed Income and Allocations
As new members of the FIX organization look out to the future, they see opportunities to expand the pre-trade protocol to the post-trade area.

"Our next jump will probably be focused around allocation processing," says NYFIX's Jamaitis, who adds, "I think that will be the next point of automation in the industry in general." Where allocations are a "buy-to-sell-side event," Jamaitis says, "That allocation process could be a little more streamlined and FIX is a good protocol to do that."

What's more, firms that want to take advantage of the allocation functionality must upgrade to FIX 4.2 or higher. Today, 90 percent of NYFIX/Javelin installations are 4.0 compliant, stemming from the Y2K conversion. Since these systems are functioning in the listed-equity space, there is not much need to improve.

"As you go into options, back-office allocations, and fixed income now, there's certainly some room for growth," says the NYFIX COO.

Thomson's Moitoso says the focus of the FIX protocol is "to support STP initiatives that are out there in equity and fixed income." Given "the economic times," he sees an emphasis on using the protocol for "cost cutting and making sure that you process trades efficiently because bad trades cost you more. It's all about efficiency and saving a buck or two."

As for challenges facing FPL, Moitoso says it will continue to build out different asset classes, "as they did with fixed income."

In Bonner's view, the challenge will be in "trying to have the same protocol for equities and fixed income, because there's this huge gap between the two of them. People on the FIX committee at the moment are very much equity-focused and then you've got the fixed-income guys who don't know much about equities. I just think there's a huge learning curve for these people and I think that's going to be the challenge for the FIX Committee moving forward." Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio