Jim Northey, Jacob’s partner at LaSalle and Co-Chair of the FPL Americas Region at FIX Protocol Ltd., further explains that risk mitigation through certification is even more crucial in today’s complex trading climate. “One common practice in the high-speed exchange environment is to remove concurrency controls and locking mechanisms to improve through-put speed and reduce overall trading transaction time. When you do this, you create a potential risk for internal processing problems. Firms need to remove these controls in order to compete and only automated software testing tools can adequately recreate the volumes and scenarios necessary to ensure that changes to the software won’t cause defects or failures. If you don’t have automated testing and certification, you can’t fully replicate these scenarios or put enough stressors on the systems.” Neglecting adequate testing and skating over certification can have an impact far beyond a problem with an individual trade, if algorithms are incorrectly configured or automated systems start performing in unexpected ways. We’ve learned that this lack of testing is the likely cause of many market incidents. Jim Northey reveals, “Since recertification isn’t currently mandated, some buy-sides don’t inform their counterparties about system changes. Improper handling of edge cases [unusual trading scenarios] frequently results in either the exchange or sell-side losing money. For example, if an exchange system behaves erratically in a high-load situation and doesn’t properly cancel an order but still sends an order cancellation acknowledgement to the trader, the exchange is responsible for covering the trade.
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Likewise, if a sell-side’s system doesn’t handle a client request properly, they too must cover the cost. Often, we never hear about these sorts of hiccups—once the problem is discovered, the firms work out responsibility amongst themselves. It only becomes public if the loss is great enough, or the parties go to court. Many of these situations could easily be avoided with more testing, and the savings would easily cover the cost of automated certification software.”
The logistical difficulty of trading across long distances is also contributing to the trend toward automation. Whether regression testing a connection already in production, or certifying a new connection; any area of non-conformance between the systems has to be discovered one message at a time. Jacob Northey calls this challenge the “ping pong effect.” Essentially, the certification process begins with initial tests. As soon as an error is encountered, the test stops so testers can identify and fix the problem. Then people at both ends of the process need to find mutual availability on their calendars, reschedule and start again until they hit another bump. This takes multiple appointments and can be a scheduling challenge. But if you add the challenge of the two counterparties being in radically different time zones, then suddenly, something which might take a week within a single time zone ends up taking three or four weeks across continents Jacob Northey points out, “Testing needs to be an asynchronous process between the counterparties to speed up this process.”
Firms that automate customer on-boarding note that clients will prioritize certifying with a destination based on their expected volume and the destination’s available liquidity. But all things being equal, they will choose which connections to launch first based on the difficulty of connecting. If the sell side or exchange is able to provide good documentation and automated certification, the customer can test without needing to schedule appointments. If the gateway allows customers to test and validate as they go, it can save them an enormous amount of time. Additionally, it saves the sell side substantial resources, as they can support 10-20 customers all on-boarding at the same time without needing dedicated support from on-boarding team members.
As a consequence, automating certification has an impact on both revenue and cost centers. A senior FIX support engineer from a tier-one broker-dealer explains, “Automating saves us potentially $200-300,000 per year just in reduced costs for testing.” This broker-dealer was able to speed up certification and get clients on-boarded and trading more quickly by automating. This speeds their time to revenue for new clients and new connections.
It also improves customer service by eliminating backlogs. The engineer from the tier-one broker explained that before they automated testing, they were way behind in bringing on new business. Customers were waiting as long as six months to get certified. Because they automated, this broker was able to completely catch up on the backlog and handle an increasing load of new business without adding staff. “We had a six-month backlog when we started. We bought FIX Conductor in June and had processed the entire backlog and all our new business in less than 6 months.” The engineer also mentioned that the automation is improving client satisfaction. “Our clients prefer having auto-certification, so they’re not tied to trading hours. It allows them to offshore their testing and certification services without being tied to a clock. One of our customers tests twenty-three hours a day—hundreds of scenarios all with the automated tools.”
Jacob Northey observes that streamlining can be even more crucial when courting new clients, whether proprietary trading firms, hedge funds or other buy-sides. “The client attention span is only going to last so long. As the number of buy-side firms has decreased, the number of sell-side options a buy-side has to choose from has greatly increased. Everyone is fighting harder for less traffic and if you can’t help them, they’ll go and have conversations with your competitors. You don’t want to be in the position where you have to resell something that you already sold and you don’t want to lose their trust. Reselling should be something you never have to think about.”
Though currently it’s a choice of whether to certify FIX connections manually versus automated processes, ultimately, the largest driver toward automation may be new regulatory guidelines. The SEC has proposed Regulation SCI, which would require market participants to have comprehensive testing systems and procedures in place. CFTC and other regulators are beginning to demand documentation of testing which may make manual compliance too onerous without automation. If this trend continues, we’ll see this burgeoning industry growing even more quickly.
Candyce Edelen is CEO of PropelGrowth, an agency helping financial companies develop and implement content marketing strategies. Prior to PropelGrowth, she co-founded two financial technology companies including Selero, a company that provided order routing gateways, direct market access and FIX connectivity.Candyce Edelen is CEO of PropelGrowth, an agency helping financial technology companies develop and implement go-to-market strategies. Prior to PropelGrowth, she co-founded two financial technology companies including Selero, a company that provided order routing gateways, ... View Full Bio