By Yasuo Hamakake
Yasuo Hamakake of Chi-X Japan catalogs the growth of Proprietary Trading Systems (PTSs) in Japan and discusses the prospects for the coming year.
Chi-X Japan launched last year, and we just passed our one year anniversary. Our launch coincided with the Japan Securities Clearing Corporation (JSCC) opening up to the PTS venues. Since the launch, volumes have grown steadily, participants continue to connect and find new trading opportunities on PTSs. We have seen new Smart Order Routing (SOR) technologies introduced by broker-dealers, which has also contributed to PTS growth in Japan. Most importantly, we are looking forward to new trading participants and growth in the market overall. Market participants who are trading with global platforms, such as Chi-X, are more likely to trade Japan via a familiar platform.
A Year in Review
At the beginning of the last year, the Tokyo Stock Exchange (TSE) upgraded to the arrowhead platform. The TSE used to take a few seconds to transact a trade, but now it is 100 times faster. For that reason, new types of participants, whether algo-driven or high frequency, can consider entering the market. Also, new venues contribute to a healthy level of competition between the venues. Each venue has a uniqueness, which in turn will motivate different types of market participants to trade Japan. Our focus is to provide unique trading opportunities through advanced order types and tick sizes, while offering a low-latency trading system.
PTSs: Price Improvement or Low Latency?
The goal is to provide an equal trading venue in the Japanese market. With our recent growth, and PTSs now accounting for over 5% of volume of the Nikkei 225, there is a positive variance for people who are trading in PTS in Japan. In terms of price improvement, Chi-X had a better price than the TSE, 93% of the time. In addition, the introduction of the maker-taker model is another motivator for new trading participants.
Regulatory Reform
The PTS rules and guidelines were established in 2000, when the market structure was very different. Some of the rules that exist today do not reflect the current market conditions. For example, one could question whether the 5% Takeover Bid (TOB) rule for the PTS venues and the 10% threshold rule are applicable for the venues today. We have ongoing dialogue with the regulators and will continue to collaborate with our trading participants.
Looking Forward
Fragmentation in Japan has naturally increased since we entered the market, but it will take time to fully develop. We can see similar trends, in terms of fragmentation, that we saw in Europe, Canada and the US. We expect continued healthy fragmentation in the Japanese market in the coming years. For example, Chi-X Japan handles about 3% of the Nikkei 225 Index value traded today. It is important to continue to work with trading participants so that they are aware of the benefits of PTS.
Our goal is to grow the Japanese marketplace together, as new participants become familiar with PTSs, they will continue to drive growth. We will continue to push regulatory reform and introduce new services and features that benefit all trading participants.
Gaining Ground: Proprietary Trading Systems Expand in Japan
Korean Market Upgrades
By David In-hwan Lee
DATAROAD’s David In-hwan Lee shows how Korean traders are utilizing FIX to improve both domestic and international trading capabilities.
How has FIX adoption improved Korean trading?
It was at the end of 2002 that Korean institutions were able to process orders from foreign institutions using the FIX Protocol for the first time. During the following years the FIX Protocol in Korea developed very fast over almost a decade of use.
Before the adoption of the FIX Protocol, approximately 60 securities firms, 40 institutional investors and multiple foreign institutions had been processing orders using telephone, FAX and emails, which were very inefficient means of one-toone communication. Now, most sell-side and buy-side firms are able to place orders conveniently and promptly, and receive execution reports realtime using the FIX Protocol.
After adopting the FIX Protocol and Order Management Systems (OMSs), both institutional investors which place orders and securities firms which receive orders and execute them at the exchange were able to improve their internal trading tasks noticeably. Korean securities firms were now able to connect via networks with the trading systems of overseas institutional investors more efficiently, in contrast with the past. Moreover, since they are actively using the FIX Protocol in connection with outbound orders such as FX transactions and overseas future trading, as well as inbound orders, the adoption of FIX greatly contributed to the internationalization of the Korean securities market.
What is the opinion of Korean brokers toward algorithmic trading?
As OMSs are adopted along with the FIX Protocol, Korean securities firms perform basic algorithm trading using the automatic order system provided by their OMS. Although they currently support simple types of algorithmic trading only, I believe that more diverse algorithm trading functions will be necessary as the Korean securities industry goes through environmental changes.
The Korean securities market is expected to go through a major systemic change in the near future. Although it has not been finalized yet, securities exchanges in Korea are expected to compete with one another starting from the second half of 2012 because the establishment of an Alternative Trading System (ATS) in the Korean securities market will be allowed by then.
Also, the Korea Exchange (KRX) announced a plan for developing a next-generation trading system EXTURE+ in late July 2011. More specifically, KRX plans to develop a new system aiming for two-digit microsecond latency for its trading system. I believe that Korean securities firms should expand the functionality of their own algorithm trading for brokerage business and adopt ultra-high speed DMA systems in order to be able to perform low latency trading demanded by the algorithm trading systems commonly used by buy-side firms. As a result of the changes in the environment of the Korean securities market, High Frequency Trading (HFT) and algorithm trading are expected to develop quickly during the next several years.
What benefits have Korean buy-side firms seen since adopting FIX?
It was the buy-side that received the greatest benefit after adopting the FIX Protocol.
Before discussing the benefits of adopting FIX, it is important to know the relevant circumstances before the adoption of the FIX Protocol. During the early 2000’s (right after the IMF crisis), Korean asset managers’ systems for managing funds had several problems. For example, the distinction of the roles between fund managers and traders was unclear, the compliance system was not established and people processed orders (placing orders and confirmation of executions) manually, often using telephone, FAX or email. Moreover, although there were back office systems for calculating NAV (Net Asset Value) and accounting, they were not prepared with OMSs for their trading systems.
Thereafter, asset management firms overhauled their business systems in order to solve the problems explained above, and buy-side OMSs were developed for the purpose of supporting their business systems. Then, OMSs that were compatible with FIX were developed and a full-scale automation of order processing of asset management firms was underway.
In the past, without FIX or an OMS, asset management firms had no choice but to perform order-related tasks with securities firms manually, although all the data necessary for order-related tasks were already stored in the ledgers of the back office system. However, the environment is completely different now. The manual tasks mentioned above have been automated thanks to to FIX, and all relevant steps from placing orders to execution reports have been automated as the result. Various aspects of tasks such as portfolio simulation, pre-compliance, trade allocation, real-time fund evaluation, real-time order placing and execution reports through FIX have been improved.
By adopting the FIX Protocol, the Korean securities industry accomplished Straight Through Processing (STP) for orders between the buy-side and the sell-side. Moreover, asset management firms realized internal STP, in which trading data circulates from back office to front office, and vice versa.
What are some of the new services and products Korean investors are requesting from you?
With regard to products, Korean investors are expecting new low latency services, such as the development of EXTURE+, the Korean Exchange’s nextgeneration trading system, and the establishment of an ATS. In particular, because KRX not only adopted FIX and FAST as message protocols for its next-generation system, but also will construct an ultra-high speed trading system, there will be a large demand within the Korean securities industry for low latency FIX engines and the messaging middleware which supports it. Also, starting from low latency DMA and algorithm trading systems, the development of HFT-related services is expected to be more popular.
It is just as likely that there will be an increasing demand in the securities industry for the development of FIX applications in Korea. Companies like DATAROAD are preparing professional FIX training sessions for Korean developers, where users would improve their understanding of the FIX Protocol and enhance domestic development capabilities.
What is needed to increase FIX adoption in Korea?
During a short period of time, the FIX Protocol spread quickly in Korea. However, in Korea FIX still needs to be applied to more business areas and adopted by broader institutions. Thanks to the adoption of FIX by KRX for their next-generation system, the FIX Protocol, which was originally adopted for transactions between the Korean buy-side and sell-side, will be expanded to transactions between the sell-side and the exchange. Also, the adoption of FAST for market data distribution will offer yet another chance to work in the benefits of FIX, which means that the scope of the FIX application is expanded once again.
The FIX Protocol in Korea has developed and established on its own, but there are factors hindering its growth in Korea. Although FIX has been successfully established in the Korean market for many years, during the last several years non-standard versions of FIX caused problems for transactions with overseas financial institutions. In particular, in order to solve the problems associated with non-standard FIX implementations in Korea and to give it a larger role in the industry, we need to establish a Korean FIX Protocol committee which will serve as the central force for a more accurate application of FIX in the industry.
With regard to the usage of the FIX Protocol among Korean financial institutions, more than 95% of the sell-side firms are using FIX. On the other hand, of the various types of buy-side institutions, such as asset management firms, investment advisers, banks, insurance companies, pension funds and other institutions, only a few of the major asset management firms have adopted FIX for their trade messaging. In order to spread the use of FIX in Korea, more institutions on the buy-side should adopt it.
While FIX adoption and development in Korea has been led by technology vendors, from now on, users should actively step forward and develop it on their own. Members of the Korean vendor community, like DATAROAD, have helped the adoption and expansion of FIX in Korea and must take responsibility for the addressing the challenges of FIX in Korea by actively supporting training sessions and user communities.
The business application of FIX in Korea has already reached a mature stage; however, we also need more effort and institutional support for the development of the FIX Protocol in Korea. I hope that all of us upgrade the status of Korean securities industry in the world through joint research within the industry and full utilization of the FIX Protocol, just as the wave of Korean pop culture has spread into Asia and the world.
Where to Connect: Choosing the Right Data Center for Trading
By Kevin Carrai
Direct Edge’s Kevin Carrai explains how they chose their new data center and what criteria were most important in making the decision.
Choosing the right data center is crucial to the success of any trading business. Gone are budgets supporting the practice of co-locating with every market center, which forces firms to take a closer look at how to optimize their connectivity and infrastructure without sacrificing performance or profits. In addition, firms now have more options than ever for where to host their IT infrastructure given the growth in the data center landscape driven by high frequency electronic trading, especially in northern New Jersey. There are several important things to consider when making this critical business decision – proximity to liquidity, cost savings, flexibility and scalability.
Proximity to Liquidity
Anyone familiar with the real estate market knows that the three most important factors are location, location and location. However, the factors that make one location better than another may change over the course of time. At one point in life, proximity to bars and restaurants may be a priority; after starting a family or getting a pet, proximity to good schools and parks may become more important. The same holds true when you are finding a home for your trading infrastructure. In the heyday of high volumes and deep pockets, firms colocated in multiple facilities regardless of cost in order to be as close as possible to liquidity destinations. In today’s trading environment, firms are reconsidering this need and are looking for a facility where they get the biggest ‘bang-for-their-buck’.
The New York/New Jersey/Connecticut tri-state area has become the location of choice for data centers that cater to the U.S. financial markets.Within this geographic area, if firms cannot be everywhere, where should they be? It is more advantageous for firms to be in a centralized location, where they can access many financial resources rather than duplicating their infrastructure at multiple data centers. Facilities that host companies who provide the same services foster healthy competition, thereby forcing vendors to improve functionality and curb costs.
Proximity to competitors, dark pools and other liquidity destinations was a key feature that attracted Direct Edge, a U.S. equity exchange that currently trades more than 9% of total consolidated volume, to NY4, an EQUINIX data center. Other market centers that have also chosen NY4 include International Securities Exchange (ISE), Hotspot FX, Boston Options Exchange (BOX) and CBOE’s new C2 Options Exchange. Having other liquidity destinations just a cross-connect away enables Direct Edge to have a robust, high performing, efficient connectivity infrastructure at a low cost.
Not only does NY4 provide proximity to a multitude of resources internally, it is well positioned physically in the NYC area. The latency between EQUINIX’s NY4 facility and Savvis, a third-party data center that hosts major exchanges and dark pools, is less than 100 microseconds.
Cost Savings
Recent conventional wisdom has been that in order to ensure profitability, trading firms had to have a presence in every data center where there was accessible liquidity. As the number of market centers increased, so did the expense required to install and support trading and telecommunications infrastructure within each facility. Firms would gladly pay the increased expense while volatility and volumes were high, but they are now taking a hard look at this strategy.
In these uncertain market conditions, firms are more cost-conscious than ever. In order to remain profitable, firms have significantly reduced technology and telecommunication spending and can no longer support the trend of co-locating their trading infrastructure in every facility. With the increasing premiums imposed by many exchanges for co-location space, trading firms are trying to save money by reducing their footprints and minimizing hand-offs. Therefore, the selection of a few key facilities, or one facility, has become a realistic alternative to multi-facility co-location, especially with the advent of low latency connectivity between market centers.
The most cost-effective solution for majority trading firms is to co-locate in a third-party data center that is home to multiple exchanges, dark pools, ATSs, hedge funds, clearing firms, market data vendors and other financial service providers. Third party data centers enable firms to efficiently access the many vendors required to do business and keep expenditure low.
Such cost savings are another key factor that led Direct Edge to EQUINIX’s NY4 facility. By leveraging EQUINIX’s financial ecosystem, which includes telecommunications providers, application and data vendors, and – most importantly – many of their customers, we have created a fast, low-cost solution to allow the exchange and its customers to quickly connect and begin trading. We uses its infrastructure at NY4 to provide a low latency network service, called Connect Edge, that enables market participants to reduce telecommunications costs.
By leveraging existing connections to NY4, firms have the ability to utilize our established network to exchanges, dark pools and market data providers rather than expend significant resources on maintaining multiple telecommunication connections to each market center or vendor. Using an existing connectivity infrastructure allows firms to increase both network and bandwidth requirements to accommodate growing business needs without the burdensome costs of additional hardware and resources. Services like this offer subscriptions on a month-to-month basis, making it easier to expand and move connections than having to work with the longer-term contracts of most telecommunications providers.
Flexibility and Scalability
Co-locating with a specific exchange is not only more expensive, it can also be more restrictive. For example, some exchanges prohibit third party market data distributors in their data centers, limiting customers’ access to important data products. Facilities operated by exchanges also require specific vendors for telecommunications, which may involve long-term agreements that restrict firms from moving or optimizing their connections.
In addition to liquidity destinations, other important vendors such as market data distributors, clearing firms and news feeds leverage third-party data centers. EQUINIX is home to more than 550 financial institutions, including both buy-side and sell-side firms, exchanges, dark pools, clearing firms, market data providers, data analytics providers, asset managers, hedge funds and news feeds.
In an ever-changing marketplace, firms need a data center that can continually meet growing needs. Third-party data centers specialize in building top-of-the-line data centers, and it is essential to their business that they always have enough capacity to accommodate customer needs. EQUINIX addresses this by adopting a campus environment for their data centers. When one facility fills to maximum capacity, they build another one next door. This circuit of data centers is then connected by dark fiber, making it a continuous network facility.
Summary
When trading volumes and volatility deflate, profits also decline, requiring IT departments to rethink the need to co-locate at every liquidity center. The proximity requirement is now being balanced against other important factors such as infrastructure installation, operating cost, flexibility and scalability. In addition, with the advent of low latency connectivity services, firms can further reduce the cost of trading without sacrificing speed of access. Third-party data centers can provide an optimal solution, placing firms in close proximity to essential financial service providers – all competing to provide the best service at the lowest cost – while providing flexibility and scalability to accommodate a growing business model.
A Matter of Semantics
By Hanno Klein
Deutsche Börse’s Hanno Klein, Co-Chair of the FPL Global Technical Committee, expounds on the role of FIX semantics in standardised access to trading and clearing services.
Why are Interface Semantics Important?
Semantics represent the look and feel of an interface from a nontechnical perspective, but can influence overall implementation and testing effort much more than the syntax. If you will, semantics are the interface language and standardization is about speaking the same language, for example FIX.
The Difference between the FIX Syntax and FIX Semantics
Syntax is the encoding of bits and bytes on the wire; for example, whether you use ASCII or binary values for numbers or whether you have a FIX tag=value syntax or an XML syntax like FIXML. The syntax consists of messages, components, fields and valid values that are the building blocks for the semantics. FIX semantics is about the business functionality and how it is expressed within the building blocks of FIX. FIX Semantics relates to the elements with which information is conveyed and about the flows through which these elements are passed back and forth between two or more parties. Let me give you some examples.
- A combination of “35=D” and “35=8” is the tag=value syntax for the semantic “submission of a new order for a simple instrument followed by a confirmation or rejection being returned”. Readers probably know these tags by the more familiar terms NewOrderSingle and ExecutionReport.
- 59=4” is the tag=value syntax for the semantic “order needs to be filled completely upon entry or cancelled immediately”. The FIXML syntax for the same semantic is TmInForce=”4”.The corresponding term for the order, Fill-Or-Kill (FOK) is a well known part of the FIX language.
- “38=1000|1138=100|1083=1|108 4=3|1085=50|1086=80” stands for “reserve order of 1000 that is to be displayed initially with 100 and to be replenished whenever a fill occurs with a randomly chosen quantity between 50 and 80”. Some might be more familiar with the term “iceberg order” which is not used by FIX.
The mapping of semantics to syntaxis not trivial and standardization is about using the same map for the same semantics to ease the burden for the software developer and reduce costs.
How can FIX semantics be used more effectively?
Greater effectiveness will come through an increasing awareness of the importance of FIX semantics for true standardization. FIX training courses could be offered with a focus on semantics and put less emphasis on the technical aspects of the protocol such as the encoding or the session layer mechanics. Usage guidelines for new and existing functionalities can help to understand the semantics behind FIX message layouts.
Without semantics it is impossible to determine which FIX fields or valid values will be present in which contexts. The syntax will merely show all possible values of a field, which may be sufficient for the developer, but not for the person who then wants to test the interface.
User Resources for Better FIX Semantics
The main source of information continues to be the official FIX specification, which is a set of documentation consisting of seven volumes. Volumes 3, 4, and 5 cover the pre-trade, trade and post-trade areas. Volume 7 is called FIX Usage Notes and focusses on FIX semantics for specific asset classes, such as FX, and specific usage environments, such as exchanges.
A fairly new source of information is the FIXwiki available at www.fixprotocol.org/fixwiki, which was donated to FPL by John Cameron of Cameron Edge. FIXwiki is an annotated version of FIXimate, where FPL members are able to add usage information to any message, field or valid value. Anyone has reading access to the FIXwiki and can see the annotations provided by FPL members. An interactive source of information for all registered users of the FIX website is the FIX discussion forum at fixprotocol.org/discuss.
Finally, there are a number of best practice guidelines (e.g. order book management, continuous quoting) that have been published by FPL Working Groups or Committees. These are available from the FPL Program Office by emailing fpl@fixprotocol.org.
Improving FIX Semantics
The situation would dramatically improve with a migration of the FIX community to the latest generation of the protocol, FIX 5, which was introduced in December 2006, now almost 5 years ago. Semantically, FIX versions 5.0 and above (FIX 5.0 Service Pack (SP)1, SP2) have remained very stable compared to the FIX 4.x versions.
There is a need to further remove semantic ambiguities in the protocol to provide greater clarification and aid implementations, which resulted from intentional changes in newer versions and unintentional overlaps with existing semantics when introducing extensions.The documentation around FIX semantics is still limited in some areas and FPL is keen to improve this, so it can meet the needs of the trading community as effectively as possible.
How can Execution Venues use FIX Semantics to Improve their Performance?
More and more execution venues want to provide their customers with a standardized interface using FIX. Performance suffers whenever a mapping is needed between different semantics, and often the core system of an execution venue has been built without FIX semantics as an integral part. This leaves the execution venue with a tough choice between performance and violation of FIX compliance. As usual, the answer is that compliance is sacrificed where performance is critical and would otherwise suffer.
It is very important to note that FIX semantics have been enhanced in recent years in order to support the highest levels of performance. Deutsche Börse and OMX invested significant effort over a few years to reduce the verbosity of FIX and this has led to a number of improvements in FIX 5. Performance is often not associated with semantics and only seen as being impacted by technical aspects such as the encoding of a message (ASCII vs. binary).
Examples of Improvements of FIX Semantics in FIX 5
Traditional FIX semantics require six messages for an IOC order that is partially filled 3 times: a NewOrderSingle to submit the order, an ExecutionReport to confirm receipt of the order, three ExecutionReports to convey the partial fills and a final ExecutionReport to convey the fact that the order was cancelled. This was a good approach in the early days of FIX when the notion of an algo trader did not exist. FIX 5 has the option to reduce the number of messages to two in a high speed environment: a NewOrderSingle to submit the order and a single ExecutionReport to convey the partial fills as well as the cancellation. Let me explain why this works.
The semantics of an Immediate or Cancel (IOC) order is well defined and will always end in the order being cancelled. The semantics of the FIX field CumQty is to convey the overall executed quantity. The FIX repeating group FillsGrp (added in FIX 5.0 SP1) lists prices and quantities of individual fills. This allows it to convey all information within a single ExecutionReport message, which dramatically increases performance for IOCs submitted via FIX.
FIX Semantics Evolving Role
Adherence to the same semantics within the same context, be it an asset class or a user environment, will be the key factor to reduce overall software development cost for the financial industry. Different terminologies are still one of the main speed bumps in communicating across organizations because such differences simply increase the learning curve for new hires, as well as the effort to interact with multiple external counterparties.
FIX is well positioned to provide such common semantics for trading, clearing, as well as reference and market data distribution services. A recent FIX initiative to develop a new High Performance Protocol will analyse and further improve FIX semantics by addressing the level of verbosity in responses. A full echo of input values is valuable in some cases, whereas a short acknowledgement of receipt is all you need in other cases. The flexibility of FIX to support different approaches may seem to be a contradiction with the notion of a standard as a single approach, however, standardisation needs to be seen in context.
It is not necessary that everybody across the globe drives on the same side of the road, but it is probably a good thing that each country defines a single side as the right one (or was it left?).
Refined Product: More than Raw FIX in Brazil
Itaú Asset Management’s Christian Zimmer and Hellinton Hatsuo Takada drill down into the usage of FIX in Brazil, isolating the areas where FIX is developing and where there is room to grow.
The BM&FBOVESPA (BVMF) initiative to provide market data using FIX is just the beginning of moving past the basic usage of FIX in Brazil. FIX is being implemented under the Unified Market Data Feed (UMDF) banner with the objective of integrating the traditional FIX market data and Multimedia Multiplexing Transport Protocol (MMTP) market data streams. The communication efficiency between these two needs to increase a lot, because in Brazil the trading community is starting to go beyond the simple use cases for FIX.
Besides the FIX implementations, one example of this development is the FPL initiative tasked with creating a version of the FIXimate in Portuguese, which the local FIX engineers are contributing to. In the last FPL meeting in Brazil, the local public seemed to be a little bit more aware of FIX, while the use of the FIXimate in Portuguese indicates a growing development of FIX solutions in Brazil.
Currently, some brokers are providing simple execution algos to be used in the Brazilian market. However, these are not delivered via FIXatdl, but via an algo-number indicated in a general purpose FIX-tag. Currently, the algos offered are very simple: mainly VWAP, TWAP, Iceberg, and POV. More sophisticated algos that try to gain some alpha are present too, but they are not originally created by Brazilian market participants. These kind of algos are normally developed from global brokerage firms at their headquarters in the US or Europe and then applied/adapted to the local market (what we call tropicalization).
Even if the algos were customized by the international firms to fit local market data, we have our doubts that on the actual trading floor there are many buy-side traders using these advanced methods. There are mainly two reasons for the nonusage of the advanced algos. First, there is a lack of confidence whether international teams understand well the local Brazilian market. Second, most of the time the big buy-side firms have mandates to achieve a 100% fill rate – something not guaranteed by the alpha-creating algos. This demand originates from the way the big asset management firms work in Brazil: they are more fundamental, and focused on allocation rather than trading.
The usage of FIXatdl could improve the usage of algos because of its standardization, but it is still hard to move forward on this issue.The sell-side seems not to be too enthusiastic, and thus, does not provide the buy-side with this efficient alternative. The buy-side is also not demanding it, which implies that there will be no advances.
In addition to FIXatdl, we expect the efforts of the FPL High Performance Interfaces Working Group to become applicable in the Brazilian market. The success depends on, obviously, if the exchange permits a separated access to their matching engine with this protocol dialect. But as there is always demand for lower latency, the outlook is positive for this initiative. The same might be true for the FPL Inter-Party Latency Working Group. Although there are hardware solutions to this problem and these hardware solutions may create less additional latency, it seems to be much easier for any mid-sized firm to use FIX-based latency analysis rather than buying an expensive system just for this purpose.
Another interesting initiative from BVMF is the proposal of a new blocktrading facility. The market does not have too many doubts that the fear of concurrency in the exchange space, possibly taking away market share through block trading facilities, motivated the BVMF to focus on this service in recent months. BVMF proposed the idea of creating new ticker IDs for the block trades; e.g. if you trade ITUB4 in a block, you might send an order with ITUB4b as the ticker. This does not really seem to be the best alternative, as one might simply resolve the indication of a block-trade with a FIX-tag. We assume the process will still take some time to iron out, similar to the UMDF deployment.
We mentioned above that most algos from international brokerage firms are already offered to the Brazilian buy-side community. The same holds true when it comes to FIX engines and OMS/EMS. Most of these systems are customized to Brazil or are in process of tropicalization. Most EMS vendors have the Brazilian market in their portfolio, but only the big names like FlexTrade have seen their systems be run by local firms. We expect that the trend for internationalization of Brazilian buy-side firms will increase the demand for these vendors in the local market, as connectivity will no longer be restricted to the BVMF alone.
Switching Platforms: Moving to the SaaS Model
By Garvin Young
Brown Brothers Harriman’s Garvin Young explains the decision to adopt a Software as a Service (SaaS) trading system in lieu of traditional on-site architecture.
In its capacity as a global custodian, Brown Brothers Harriman (BBH) takes a holistic view of its trade execution process. This view includes front-end connectivity and execution, all the way through to settlement. The firm continually assesses the current and future needs of its clients to ensure that its products and solutions fully meet their requirements.
Searching for a Cutting- Edge Solution
In late 2010, given the rapidly changing landscape of the brokerage industry related to connectivity, regulation, algorithms and back-office efficiencies, we initiated a RFP process to identify an order management system that could best position its clients for the future.
Specific details of the project included a buy versus build analysis, cost/resource considerations, client retention rates, etc. Given the timeframe that we had set for implementation, it became clear that a build-from-scratch solution would have been both costly and impractical. Such a solution would have required BBH to add staff, incur IT spend, expand occupancy space, and bear significant ongoing maintenance costs.
Through the RFP process, we looked for a provider with a reputation for stability. In an environment of microsecond execution, an OMS must be reliable, stable and flexible. The ability to customize the solution was also important. The solution had to include a robust front-end while also keeping with BBH’s requirements of high-quality middle- and back-office processing. Our integrated execution and settlement product required a solution provider with strong expertise around maintaining high straight-through processing levels and real-time client reporting.
As a privately held organization, BBH maintains a high focus on risk management, which meant that a strong track record of regulatory reporting and risk management tools was also critical. The firm’s global and sophisticated client base has complex connectivity requirements, such as Reuters, Bloomberg, ULLINK, SWIFT and virtual private networks (VPNs), to name a few. Further, its clients have specific FIX tag requirements and run multiple versions of the FIX Protocol. We required a solution that was able to meet all these demands.
Identifying the Right Provider
BBH narrowed the search to six top providers of equity execution platforms and went on to select Fidessa. BBH’s Investor Services clients recognize us as a leader in technology solutions, with the capability of offering them a sustainable, long-term and flexible solution that allows them to access new markets to grow their business. We determined that their platform aligned well with these needs, and offered an ideal complement to its existing proprietary solutions.
Fidessa is a provider of high performance trading, investment management and information solutions for the global financial community. We particularly liked the robust capabilities in their core execution platform, including its extensive global markets coverage, product stability and configurability and, importantly, a willingness to partner with BBH to customize the platform to its specific requirements, including integration with our proprietary back-office applications.
Migrating with Success
Having selected Fidessa, we performed a thorough evaluation of two of their three operating platforms, Enterprise (self-hosted) and SaaS (Fidessa-hosted), and finally selected the SaaS model1. High performance, the overall ease of implementation, the ability to easily onboard new clients or markets and the clear level of control and monitoring over the hosted environment were all factors considered in this decision.
We worked closely with the Fidessa team to create an implementation plan that thoughtfully managed the risks inherent in a platform conversion while making the conversion assmooth as possible for clients. A controlled and phased transfer was adopted, consistent with our risk management policies, with individual client migrations being scheduled based on factors such as volume, connectivity network, and trading profile.
The migration approach involved running two systems simultaneously. We looked at client trading profiles, connectivity requirements and internal reporting to categorize clients into several tranches. Once a tranche was established, clients were migrated over one at a time depending on their test results. The conversion schedules increased with the success of the first few client migrations. Once connectivity and the downstream processes were verified the last phase involved managing clients with open orders.
The BBH Systems development team performed a total redesign of its internal mainframe to accommodate the interface between Fidessa and its back end processing systems. This included redesign, coding, regression testing, upgrading servers, ordering multiple T3 lines, business continuity planning and stress testing. As a global custodian to many of its execution clients, BBH automates the execution process along with the settlement so it was imperative that this process delivered the same high quality service that its clients are accustomed to receiving.
Thanks to the close collaboration between BBH and Fidessa, we are happy to report that we have now successfully migrated 99% of our clients to the new platform with minimal client disruption. The SaaS platform has, so far, proved to be extremely stable during the most recent period of high trading volume and volatility.
1 The third is managed enterprise – Fidessa hosted, self-directed.
Swapping Opinions
The Commodity Futures Trading Commission’s (CFTC) Bart Chilton shares his thoughts on proposed measures to regulate the swaps market, including the Swap Database Rules, Swap Execution Facilities and coordinating with European regulators.
How will the database rule improve risk management at a macro level?
One of the big problems during the Financial Crisis in 2008 was that regulators, such as the CFTC, Treasury, and the Federal Reserve Bank, did not know what was going on in the off-exchange, dark markets. This uncertainty contributed to the panic, hampered the efforts to resolve the crisis, and slowed efforts to restore confidence in markets. No one knew the big picture, and incomplete knowledge bred fear and uncertainty.
That is why the Swap Database Rules (SDRs) were created in Dodd-Frank. They give regulators a front row view of everything that is going on in these markets on a 24/7 basis. It is a new world out there. Bad actors must understand that they are being watched unlike ever before. There will not be anywhere to run and hide. Regulators will have this view into trading and the authority to go along with it. We will use it if necessary to protect the financial integrity and well being of our economy.
How is the CFTC working with European Securities and Markets Authority (ESMA) and others to coordinate the oversight of the swaps market?
The key to international regulation is coordination. Each country must resist the short-term temptation to go easy and pursue a ‘race to the bottom’ strategy at the expense of others. The United States has taken a lead by enacting Dodd-Frank over a year ago. It sets high standards, and we are working with our counterparts worldwide to make sure strong and effective regulation of these markets prevails everywhere that it matters. There is too much at stake for every nation’s economic well-being to allow lax standards to flourish and regulatory loopholes to fester.
What adjustments will traders have to make in response to the establishment of SEFs?
Swap Execution Facilities (SEFs) level the playing field for traders. Transparency – the open flow of price information – is what SEFs are all about. Markets thrive when information is plentiful and open to everybody.
A key to public confidence in the markets is fair and open pricing. That is why SEFs were created, to shed light on how these markets work. Competitive pricing and openness are essential components of effective market regulation. They are also good for the economy overall because people have more confidence when markets operate openly and fairly. Open markets mean better prices. That is good for everyone.
Most compliance will be handled through dealers. Traders will not incur anything near prohibitive compliance costs. That is contrary to what the dealers and Wall Street’s lobbyists are saying in Washington, I know. Nevertheless, it is true. End-users will benefit big time from the better prices that openness and transparency will bring. That is what free markets are all about: competition and efficiency.
What concern do you hear most frequently from financial professionals about the implementation of new swaps rules?
There is a lot of concern over costs. This has been stoked by the dealer community that has enjoyed healthy profits from these dark markets. Once our rules are implemented, people will see swap prices and costs become much more fair and reasonable overall.
What is the next step in fleshing out the regulations for swaps, per Dodd-Frank?
We are working hard to get our rules finalized. It is a big project, and naturally it takes more time than we had hoped. We missed our deadline in July, but we will have much of the work done by early 2012. We are making good progress now.
Are there any swaps regulations that may have to be revised or redrafted in the coming months, years?
Most of what we have been working on so far have been proposals, which we have published for public comment. While we have done our best to get our proposals right, we are not perfect and we will definitely be modifying the proposals in response to the very valuable input that we have received fromthe public. Before we go final, we want to do the best that we can.
日本の株式市場で確 実に自歩を築くPTS
By Yasuo Hamakake
浜欠康生氏 (Chi-X Japan代表兼CTO) が 日本におけるPTS (Proprietary Trading Systems) の成長や今後の展望について語る
Chi-X Japanは7月で開業1周年を 迎えることが出来ました。我々の開業 と同時に日本証券クリアリング機構(JSCC)がPTS取引の清算を開始したのも奏功し、開業後Chi-X Japanの取引は順調に伸びており、PTSの活用に新たな機会を見出すプレーヤーも継続的に増えています。また、証券会社によるSOR (Smart OrderRouting)技術の開発・導入の加速化も日本におけるPTSの成長に繋がっ ています。Chi-X Japanとしては、これまで日本での株式取引がなかったプレーヤーの呼び水となることで、日本の株式市場の底上げを図りたいと考えています。具体的には、海外にお
いてChi-X等のグローバルプラットフォームに慣れ親しんでいるプレーヤーは、新規参入の有力候補先となる模様です。
開業1年目を振り返って
昨年初頭、東証はアローヘッドにシステムをアップグレードしました。それ以前は数秒かかっていた東証での注文約定が、現在はその100倍も早くなっています。これが弾みとなり、アルゴや高頻度取引 (HFT)など、新しい取引形態を有するプレーヤーが日本の株式市場への参入を果たしました。また、新しい取引執行の場ができることは執行市場間の健全な競争を促します。Chi-X Japanは先進的な注文形態や独自の呼び値、また日本最速のマッチングエンジンを有す執行市場です。競争を通じて各執行市場が独自性・利便性を向上させることは、日本の株式市場に多様なプレーヤーを惹きつけることに貢献していると思います。
PTSの進化
我々の目標は公正な取引の場を日本 市場で展開することです。我々の成長、また、日経225におけるPTSシェアが5％を超過したという事実は、日本のPTSで取引をしているプレーヤーがPTSに意義を見出している証左です。直近のデータでは、Chi-Xでの取引は、93%の確率で東証の価格より有利な値段で取引が成立しており、いわゆる価格改善効果を提供しています。また、メイカー・テイカーモデルの導入も新しいプレーヤーの参加に繋がりました。
規制改革
各種PTS規制およびガイドラインは2000年に策定されましたが、マーケットの前提条件は現在と大分異なっていました。そのため、現存するルールの中には現状のマーケット状況を必ずしも正しく反映していないものもあります。例えば、5％TOBルールや10%マーケットシェア規制などは、現状でもそのまま適用されるべきものか疑問に思われます。我々は規制当局との対話も定期的に行い、その他市場関係者の皆様とも協力関係を築いていきたいと考えています。
今後の展望
Chi-Xの市場参入後、日本における市場のフラグメンテーションが進展していますが、まだまだ途上です。ヨーロッパやカナダ、アメリカでもフラグメンテーションは同様に進展しました。我々は健全なフラグメンテーションの進行が日本市場において継続していくことを期待しています。例えば、Chi-X Japanは今のところ日経225構成銘柄の約3%の取引に関与しています。PTS活用の利便性に対して理解を持つプレーヤーと共に、更なる啓蒙活動を実施していきたいと思います。
我々の目標は、出来るだけ多くのプレーヤーにChi-X Japan活用の意義を体現してもらい、それが日本の株式市場全体の成長に繋がることです。規制当局とも協力の下、新しいサービス・商品の導入に努力を注いでいきたいと存じます
中国市场向前“迈进”
By Bai Shuo
上海证券交易所（上交所）白硕总工程师介绍STEP协议的重要性及其在中国的发展
STEP协议是如何开始的，它是由哪些组织最早开发的？
早在2003年，在开始筹备新一代交易系统（该系统于2009年11月23日上线）项目时，上交所就已决定引进一套基于消息的交易所与券商之间的协议 ，该协议被广泛认可为金融信息交换协议（FIX）。这一开创性的工程获得了中国证券监督管理委员会（证监会）的支持。在全国标准化的框架下，该协议成为证券行业的八大标准之一。WG01工作组负责在证监会的指导下起草该协议。WG01工作组的成员包括：上交所、深交所、上期所以及国信证券等证券公司。该协议被正式命名为《证券交易数据交换协议》，简称STEP协议（非正式名称为中国的FIX，或CFIX），它的推出被视为建立一流证券市场的第一步。STEP 1.0版编写于2004年，并于2005年发布。2006年，STEP被修订为1.1版。
STEP是如何适应中国金融界的总体标准应用的？
虽然FIX是证券行业的全球标准，但STEP更适合中国市场，因为STEP引入了许多本国业务，并对若干消息与字段增加了本地定义。比如，国内证券交易需要控制到投资者账户，这一信息被纳入Parties组件。同时，在8500到8540区间为中国分配了41个字段，用于行情揭示以及各种基金、权证、投票业务。对现有字段取值扩展定义的有：订单类型（tag40）、订单拒绝原因（tag103）、行情条目类别（tag269）、交易状态（tag326）等。
STEP的应用范围如何？其涉及交易周期的哪些部分？适用于哪些资产类别？
STEP涉及交易周期的交易前及交易部分以及一些特定的注册指令。STEP适用于股票、基金、债券、权证、交易所交易基金以及许多特色非交易业务，如首次公开发行、股票增发、基金申购及赎回、权证行权、债券出入库、股东投票等。
较早采用STEP的组织有哪些？有哪些组织目前正在使用STEP？为什么？
上交所已经把STEP用于Level 2行情信息服务，业内相关的信息服务商同期启用了STEP协议。原因是，对于这类创新型的技术服务，采用STEP可以利用其容易扩展和便于维护的特性，且没有兼容遗留接口的负担。
STEP的下一个发展阶段是什么？近期内STEP采用率增长最明显的领域是什么？STEP有新的目标或应用吗？
由于过去五年中许多新业务的推出，STEP正在进行修订。STEP/FAST近期将用于上交所Level 1行情分发。上交所综合业务平台（ATP）上的大宗交易业务、报价回购业务以及约定购回业务、转融通业务也将在近期采用STEP作为业务记录标准格式。在未来，待在创新型业务上积累了更多的经验后，我们将逐步地在传统的核心业务上应用STEP协议方式来作为接口。
China's Domestic Buy-side take the Stage
By FIXGlobal
On 5th July, 2011, more than 115 domestic Chinese buy-side representatives gathered at the Westin Beijing Financial Street for the OnDemand event to discuss issues related to the Qualified Domestic Institutional Investor (QDII) scheme. In a focused program covering regulation, working with international brokers, product development and case studies from QDII firms, a few key presentations stood out.
The panel with Jack He of BNY Mellon Western Fund Management, Edmond Ng of HSBC Securities Services and Jerry Xie, formerly of Guotai Asset Management, was an excellent resource for newly approved QDII firms, as was the session on trading international markets from China, with Alan Dean of HSBC.
The timeliness of the event was captured by Jack He: “The QDII conference timing was well chosen. As US market indices have returned to pre- financial crisis levels and the Chinese market keeps looming around 3000, investing in overseas markets is back on many investors’ agenda.”
Click here to view photos of the event.
