FIXing derivatives: The need for standardisation in the derivatives industry
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Abstract The Financial Information eXchange (FIX) protocol was originally developed with equities in mind, but later versions have included fields for exchange-traded derivatives and beyond. This paper looks at the benefits the standard could bring to the derivatives market.
INTRODUCTION
Derivatives Use, Trading & Regulation, Vol. 11 No. 2, 2005, pp. 157–161 䉷 Henry Stewart Publications, 1747–4426
The Financial Information eXchange (FIX) protocol was developed by the banking IT industry for its own use — it was borne out of a need to effectively communicate indications of interest for equity trades and automate what was essentially a very mundane daily chore. The latest version, FIX 4.4, has come a long way from those early days, and has been gradually extended to communicate any kind of order, including exchange-traded derivatives. Furthermore, the FIX Standards Working Group has taken FIX from the front to the
back office, creating an XML version of FIX — FIXML — for communicating post-trade confirmations. A memorandum of understanding between FIX Protocol Ltd and the Futures Industry Association (FIA) in 2003 served as a catalyst in convincing the exchanges and clearing houses that standardisation in the electronic communication of orders and confirmations was in everyone’s interests. The need for standardisation of exchange-traded derivatives’ order routing and confirmations has never been greater, owing to the globalisation of the industry. Regardless of the technical benefits of a standard, just getting all the derivatives exchanges and their members to use a common vocabulary and message semantics for describing a trade would be a major achievement. Few banks are members of just one exchange and, as the exchanges launched or built electronic trading systems, each did so in complete isolation, so that
Derivatives Use, Trading & Regulation V olume E leven Number Two 2005
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each exchange built a different proprietary application programming interface (API). It is down to banks to maintain these crucial links to the exchanges. Some clearing firms are known to be maintaining up to ten different market data APIs from exchanges and every time an exchange launches a new product, the re-engineering process begins over again. Lack of consistent use of the standard greatly affects the success of its adoption; it is these foundations that are being hammered out now between the multi-exchange working groups. Having a standard will inevitably bring cost savings for clearing firms, as they will be able to replace multiple proprietary APIs with a single interface. To some extent, in the early days of electronic trading, the better the API, the faster the exchange, but today there is little competitive edge to be gained through lack of standardisation. Last year, Eurex and Deutsche Bo¨ rse launched their Xentric FIX Gateway; both use FIX as an alternative standard in parallel to their Values API for order routing and trading confirmations. According to a spokesman for the German exchanges, the aim is to give banks a
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