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by Robert Stowsky and Jim Northey | October 2004 |
The Futures Industry Association has been very involved in encouraging standardization across the financial markets. The FIA Standards Working Group’s work has centered on including derivatives in FIX for order routing and developing FIXML for post-trade processing. Since the signing of the memorandum of understanding between the FIA and FIX Protocol Ltd. in 2003, the two organizations have made considerable progress in championing standardization. Despite this progress and the popular notion that FIX is the de facto standard for derivatives order routing, a common standard is far from a reality.
How far have we come and what is being done to expand the role and increase the value of FIX as the basis for a full trading cycle messaging standard for listed derivatives markets?
A FIX Report Card
The listed futures and options markets have standardized around the use of the tag=value based FIX 4.2 version of FIX for order routing. Internationally, the past year has seen some very encouraging news in terms of FIX adoption. Eurex released its Xentric FIX Gateway. Meff released its FIX 4.4 Gateway, which is arguably the most comprehensive and standard implementation of FIX for derivatives markets released to date. Even with the additional FIX adoptions, however, there are still several marketplaces that do not support a FIX interface. And even among the marketplaces that have adopted FIX, there is significant disparity in how the standard has been implemented, greatly minimizing, though not eliminating, the value that can be achieved via FIX adoption. Order routing applications are increasingly being required to be intelligent enough to make routing decisions based upon
market data. Even overlooking the lack of standardization in the use of FIX, the greater problem is that every market has a different proprietary market data interface, which further lessens the value of FIX to the user.
With regard to market making, technological issues arise in terms of being able to use FIX for ultra high volume applications that are required to consume market data events and then automatically generate market quotations in response. The sheer volume and rate required to quote listed option series pushes the tag=value version of FIX to its limits. For order-only markets, the necessity to perform order chaining when canceling orders to refresh markets creates considerable overhead. Order-only markets must look to the FIX quoting models as provided in FIX 4.3 and FIX 4.4 as a means to provide a common market making model across markets. Until FIX can provide a clear solution for high volume market making, the dominant market making APIs will continue to be proprietary.
The good news in standardization is clearly found in the clearing/back office space for listed derivatives markets. There has been an incredible degree of cooperation between the U.S. listed markets, clearing organizations, vendors and FCMs in developing the FIA Extensions to FIXML 4.4 for Listed Derivatives Clearing. This initiative started by Chicago Mercantile Exchange and the FIA
Standards Working Group is now paying off with production applications being implemented and released by the major exchanges and vendors.