Fixed Income Focus | Sassan Danesh Setting standards
Sassan Danesh, FPL Co-Chair, Global Fixed Income Committee, and Managing Partner, Etrading Software explains how and why the increase in adopting the FIX connectivity protocol in fixed income trading came about.
Historically, a large percentage of fixed income trades have been bilateral OTC deals arranged via a sell-side broker. Executing these deals required the broker to field a large sales force to handle calls from the buy-side and facilitate the transaction with the broker’s market-makers. Needless to say, this model involved extensive costs, which led to the emergence of early fixed income electronic trading platforms at the turn of the millennium, seeking to provide a low-touch and streamlined execution service for bond trading. However, the market share of these venues was small due to a number of challenges. One of the hurdles faced by market participants attempting to use these platforms was that connectivity to them was difficult and often rather expensive. This was because the fixed income trading workflows were much more complex than for equities. This meant that using a standard such as FIX presented many challenges, as sometimes the messaging language did not offer the functionality needed to manage these workflows
Best Execution | Spring 2013
and as a consequence the early platforms each developed their own individual proprietary protocols. The financial implications of this were huge, with some firms estimating it was costing multiple times more to connect to fixed income venues via a proprietary protocol, versus equity trading platforms offering standardised FIX connectivity. For a while, the financial benefits of moving to electronic trading allowed firms to absorb these large connectivity costs. However, the impact of the financial crisis and the resulting wave of new regulation led to reduced profitability, increased obligations on the industry to enhance transparency and a more fragmented marketplace emerged. This accelerated the need for a more efficient electronic trading environment.
The role of FIX In mid-2011, representatives from the broker-dealer community, approached the non-profit FPL (FIX Protocol Ltd.) organisation in order to work towards establishing FIX as the open standard for connectivity to
both existing and new venues, so that the industry could benefit from the greater transaction efficiencies and the lower cost connectivity enjoyed by equities, and also increasingly by the FX and derivative markets. In response to this request, FPL formed a group to address the challenges emerging in this environment. Through the work of this group, in 2012 FPL produced recommended guidelines for how FIX could be used by new swaps trading venues called Swap Execution Facilities (SEFs) – established in response to the Dodd-Frank act in the USA – to trade interest rate swaps (IRS) and credit default swaps (CDS). These guidelines are now being used to support FIX implementations by a number of SEFs. The urgency to prioritise these products was dictated by the imminent regulatory need for SEFs to be operational. Once the swaps guidelines
were complete, the group then turned its attention to the use of FIX in the cash bond markets and resulting FIX guidelines were released in February of this year.
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