Tim Quast
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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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September 30, 2001

Needing Another FIX

By Sam Johnson

Five years ago at a conference usually associated with the backoffice, one topic was avoided like the plague. The topic was FIX, shorthand for Financial Information Exchange, the globally accepted standard for electronically communicating trade information.

Today, at the same SIBOS conference hosted each year by SWIFT, the topic is centerstage. Now the vendors serve the interests of the front as well as the interests of the backoffice. (SWIFT, an industry-owned cooperative, provides secure messaging services and software to about 7,000 financial institutions in some 200 countries.)

What has happened? There is, of course, Straight-Through Processing, the push towards settling trades one day after trade execution. But that does not answer the question of why concerns have changed. STP is still mostly an area dominated by U.S. parties while the SIBOS conference is global in outlook.

The driving force is trade globalization - the idea that U.S. fund managers can trade seamlessly with European and even Asian points of liquidity, and visa versa. This global marketplace requires a sharp focus on protocol compatibility. That means counter-party connectivity while ensuring that trading networks are free of both error and risk.

One example of protocol compatibility came earlier this year when FIX and SWIFT announced plans to combine the two protocols. While this will require work by U.K.-based FIX Protocol Ltd. (FPL), SWIFT and the vendor community, it does recognize that the trading process must be absolutely seamless if transactions are to be processed globally with efficiency.

While FPL and SWIFT focus on the actual structure of what will become ISO 15022 XML (the new protocol when SWIFT and FIX are combined), vendors must look at the solutions they are providing the industry. Many focus only on providing solutions around either FIX or SWIFT. That limits their expertise. Vendors must expand, becoming more open on protocol and focus on the overall trading process.

When FPL proposed that the securities industry introduce FIX certification, it led to a new level of efficiency in industry connectivity. Fund managers and broker dealers could ensure that trade counterparts were speaking their language. This would make the business of trading much easier. Having ascertained the huge cost of creating such a certification infrastructure, FPL continued to promote the idea but left it up to the industry to work out the details.

The idea of certification is still essential, even if it only focuses on the FIX community of users. But this issue is compounded in a world built on FIX, SWIFT, and ISO 15022 XML communication, not to mention protocols like RIXML, FpML. (On the fixed-income side, the Bond Market Association is looking for standards too. Therefore, a vendor should aim to provide a network that accommodates all types of certification for all financial instruments and for communication market data.)

By strengthening external counter-party connectivity, both risk and error are taken out of the equation, facilitating errorless global trading. But it doesn't stop there if the focus is on the entire process.

Ultimately, a firm will take all this external trade information (which will increase once the industry steps up its trading across continents) and bring it in-house. There it will weave its way around the network, touching disparate systems and complex applications.

If and when problems arise, even in a limited trade environment, will these issues be addressed expeditiously and by the right trade partner? The answer is to make the network more intelligent.

An intelligent network is not just a new industry buzzword, or an oxymoron. It is a necessity. A network that is aware of the health, not only of the protocol connection between firms but also of the communications among systems within firms, will reduce the complexity of a system.

This provides an appropriate approach for building solid global electronic trading and settlement architectures across multiple networks and protocols, with a level of reliability not seen today.

SIBOS is an example of where the securities industry is headed. It shows how far the industry has come in acknowledging that the trade process (not just a piece of this puzzle) is what requires concentrated focus.

Sam Johnson is the president and CEO of TransactTools, a company based in New York that provides a platform solution for external electronic trade connectivity.