Commentary

Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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April 1, 2000

The FIX Esperanto

By George Kledaras

I realized early on that computers connected to networks were going to help people trade better. If the Internet was destined to revolutionize trading, I mused, it couldn't go it alone. There had to be a way for details of a trade to be communicated over the Net. You couldn't just shoot data over a nebulous network and expect it to reach the correct destination.

The Internet needed a roadmap, of sorts.

In 1993, I came across a fledgling protocol called FIX - shorthand for the Financial Information Exchange. With FIX, buy- and sell-side institutions could easily reach the other side of the trade.

They could literally create wealth simply through effective communication. FIX solved a problem that the Internet, by itself, couldn't.

While FIX made a splash nearly eight years ago, it is making a new one right now by changing the nature of the relationships it helped to create.

Due to its ability to increase the physical number of trade connections and the quality of the message, FIX is now expected to solve problems. In this role, we have seen FIX exceed client expectations.

Straight Talk

FIX lets buyers and sellers speak the same language. That means, in essence, that FIX creates a unified trading culture. Originally, FIX was concerned only with automation.

Now, a FIX connection translates into increased order flow. That translates into an increased need for effective communication, which translates into relationship building.

It becomes easier, and more lucrative, to trade with someone using FIX rather than someone not using FIX. Because of this, for the first time in my career, I feel that fund managers actually understand the value a broker can provide. And global exchanges are catering their products directly to the institutional buyside, which means we have come full circle.

Better Job

Exchanges understand what a portfolio manager needs in order to do the job better, which is great for the buyer because he obtains better prices, matching liquidity to trades, and lower price impact. It is also great for the seller.

The seller can focus on profitable niches, or better quality and informed order flow from the clients. The quality of the relationship between buyer and seller is better than ever.

As FIX has enabled brokers, exchanges, and networks to enjoy a drop in transaction costs, while experiencing gains in processing efficiency, there is still room to add increased value to each transaction (in the form of service and quality of execution, market impact, prices and reports). And brokers are actualizing gains in efficiency by specializing in liquidity, by quality of research, or by the ability to get the best prices on certain industry groups.

Through FIX, they market their inventory in the form of prices and quantities to their institutional clients electronically, keeping in touch with hundreds of clients in real time, on a global basis, while still retaining a high level of service. For example, if a client loves pharmaceutical stocks, that broker can target the market better.

I expect that brokers who provide the right kind of value, and who fully exploit the inherent value of a FIX connection, will continue to excel. They will create even more room for niches like execution services. New opportunities will continue to be unmasked once inefficiencies between buyer and seller are addressed.

Food For Thought

The task of managing relationships is not a trivial one. Just over the last six months, I have seen how important a single FIX relationship is between a buyer and a seller.

The cold, hard fact is that both sides of the transaction - the order flow and indication of interest sides - are coming through hundreds of new connections. Quality trades are being sent to hundreds of clients and myriad points of liquidity (and no longer just a handful).

Managing these relationships requires a lot of software built into order management systems. Capabilities must be customized for every broker or client.

Managing hundreds of clients is just as hard as keeping in touch with hundreds of friends through e-mail. If the end result is a wealth of better, stronger relationships, the value of that service is immeasurable.