Increasing buy-side adoption of the FIX protocol is expected to further raise the profile of the front office messaging standard in institutional trading strategies over the coming year, according to a user survey conducted by DCE Consultants on behalf of the European FIX steering committee.
The survey covers information provided by 43 institutional fund mangers (buy side), 25 broker-dealers (sell side) and 47 vendors from across the UK and Continental Europe. It is published at a time when the FIX Protocol Ltd is expanding its membership to a much wider group, such as vendors, consultancies and exchanges, and as the protocol itself is adopted for new asset classes and investment areas.
It finds that FIX adoption is wide-spread amongst the sell side with 85% of participants providing this capability. Currently 31% of buy side firms have FIX capability installed and a further 24% are currently implementing.
However, FIX order flow is limited with only 13% of buy side and 24% of sell side firms generating over 25% of their order flow through FIX. This is a function of the lower adoption rate amongst the buy side. For those buy side firms who have FIX in place, 45% are generating over 25% of order flow through FIX.
Key hurdles to implementation are identified as FIX interpretation differences, reference data, and broker and buy side IT capability.
The survey finds that participants use a mix of in-house systems and packages and satisfaction ratings vary widely. Most buy side firms use vendor OMS packages. Of the 30% that use in-house developed systems for trading, only six per cent use them for FIX trading. Packages most used by buy side participants include Longview, Decalog, MacGregor, Bloomberg, HiInvest and Charles River. In-house built OMSs are still predominant for the sell side (57%) and the most commonly used packages are Fidessa and Bloomberg.
Javelin Technologies provide the most popular FIX engines while TNS Fastlink is the most popular network, however there is a large proliferation of networks used, raising issues about network interoperability. In the survey, 69% of networks provide connectivity to other FIX networks. Software satisfaction ratings vary widely from 1.7 to 4.6 on a scale of 1 (lowest) to 5 (highest). Among FIX engines, CameronFIX outscored popular packages from Javelin and Financial Fusion for overall satisfaction.
Equities are the predominant asset class for FIX used by the buy and sell participants (FIX users only) and supported by all vendor types. In one year’s time, the buy side expect a modest increase in the use of alternative products such as fixed income (18% rising to 22%) and derivatives (11% rising to 19%).
In contrast, sell side provision is expected to increase substantially for fixed income (18% rising to 46%), and derivatives (18% rising to 38%). Part of the reason for buy side focus on equities is the limitation of their OMS to support alternative products. In the survey, only 24% of OMS packages support fixed income rising to 59% in one year’s time.
Advanced use of FIX is set to rise including programme trading, indications, cross orders, allocations and multi-day orders. Currently 83% of buy side users have focused their FIX capability on basic order handling with 33% using FIX for programme trading, 22% for indications and 28% for cross orders. The sell side provides broader support for these trades with 95% supporting block trades, 64% programme trades, 86% indications and 23% cross orders.
In a year’s time, the buy side preference for indications will rise to 65%. With regard to order types, 81% of buy side clients will demand multi-day orders and 77% of sell side institutions expect to support this order type.
Over 50% of vendors (OMS, fix engine and networks) support this functionality and this is expected to rise to 70-90% in a year’s time.
Practically all buy side (94%), sell side (96%), and vendor (95%) respondents say that FIX will be the dominant standard for electronic trading. This is particularly significant as it includes a large proportion of non-FIX using buy side respondents. The five per cent of respondents who did not agree that FIX will be the dominant standard for electronic trading believe that interbank messaging agency Swift will be more dominant in supporting the pre-trade and trade phase.
When participants were asked to rank the most important change to current trading practice, reduction of operational errors obtained the highest score, ahead of active buy side order management and alternative trading venues. The most popular alternative trading venues supported by all participants are US ECNs Posit, E-Crossnet and Liquidnet. Despite this, approximately 75% of the buy side and sell side institutions expect traditional exchanges to remain the dominant source of liquidity over the next five years.