FIX to Support High-Frequency Trading

Terry Flanagan

FIX, the global messaging standard for communication of trade-related messages, is being upgraded to adapt to the high-frequency, multi-asset trading strategies of the second decade of the 21st century.

Since its inception in 1992 as a bilateral communications framework for equity trading between, FIX has become the de-facto messaging standard for pre-trade and trade communication globally within the equity markets, and is now experiencing rapid expansion into the post-trade space.
The FIX protocol is gathering increased momentum, as it continues to expand across the fixed income, and derivative markets.

“Regulators are promoting increased standardization in fixed income markets,” said Jim Northey, co-chair of FPL Americas Regional Committee, at the FPL Canadian Trading Conference in Toronto on Tuesday.

“The Dodd-Frank Act reforms seek to achieve greater market transparency by requiring most types of OTC derivatives be cleared through CCPs and traded on swap execution facilities,” said Northey.

To address issues associated with high-frequency trading, FPL has created a High Performance Interface Working Group, organized into subgroups which will focus on specific aspects where fit-for-purposefulness of FIX for high performance financial transactions can be improved.

An example of where FIX is no longer fit for purpose is time stamps.

“To be a credible exchange, you need to have one millisecond or less response, which equates to 500 messages a second,” said Bill Hebert, co-chair of the global education and marketing committee at FIX Protocol Ltd. “FIX error recovery takes five seconds, which means you have the potential of losing 100,000 messages.”

The FIX infrastructure, knowledge and data, from the use of FIX in order processing, can be leveraged in the post-trade process.

In April, FPL issued FIX guidelines to enhance the global equity post-trade process between the buy side and sell side.

“FPL is keen to promote adoption to support equity post-trade processing,” said Northey.

Extending the use of FIX substantially reduces complexity in the communication and matching process, resulting in fewer matching issues, faster processing and lower costs.

Many parties must cooperate in the post-trade process including buy-sides, broker dealers, custodian banks and central clearing. The current process is complex and requires considerable human intervention.

Promoting FIX adoption for post-trade processing is consistent with the recommendations set forth in the widely adopted Investment Roadmap, which FPL produced in collaboration with other leading standard bodies.

Since its launch, the Investment Roadmap has been providing the industry with clear direction as to which standards are, and should be used to support business processes throughout the various stages of the investment life cycle to provide optimal transparency, consistency and operational efficiencies.

Last week, FPL issued updated best execution guidelines, including specific enhancements that provide greater insight for firms trading on European equity markets, which will be subject to increased transparency requirements under MiFID

The guidelines focus on requesting sell side firms to tag their trades with specific details using FIX, such as on which venue or exchange the order was executed, whether the execution took place on lit or dark order books, whether the order was executed as a result of having traded passively by posting liquidity or aggressively by taking liquidity, and whether the trades were executed on an agency or principal basis.

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