What do the Internet and the FIX protocol have in common? Both are red hot.
And both are perfect examples of how improvements in communications technology do not necessarily improve information quality.
Poor content dressed up and delivered in streaming HTML format over the Internet is still poor content. A Financial Information Exchange, or FIX message, from a broker sniffing out market demand – rather than looking to execute a customer order – is still irritating.
So while FIX holds within its grasp the promise of improving the quality of buy-side and sell-side communication, it cannot do that alone.
Protocol
Simply put, FIX is an electronic messaging protocol. When utilized in the industry's trading systems and networks, FIX allows messages to be exchanged between buy-side and sell-side firms without special customized integration efforts.
Using systems written with FIX specifications, firms can advertise trades, indicate interest in markets and exchange pre-trade data with each other. The process is seamlessly electronic.
Technologically, FIX provides an open standard that can serve as the starting point for all development efforts. That enables an easier linkage with a wide range of counterparties.
In the early 1990s, FIX began as a small-scale initiative to improve the quality of information exchanged among a few top securities firms.
What eventually grew out of the original protocol was a number of vendor-delivered, FIX-compliant trading systems that provided broad connectivity to the industry's top players.
The continuing evolution of FIX demonstrates how various trading applications and services can be easily integrated, leading the industry toward its long-heralded goal of straight-through processing. FIX has become one of the most talked about initiatives on Wall Street.
What advantage is FIX actually giving to its users? That depends on which side of the street they reside on. For the most part, brokers benefit from FIX by being able to send indication-of-interest (IOI) messages to a vast universe of potential buyers.
The popularity of the IOI is phenomenal, with more than 200,000 messages transmitted during an average day. Roughly 20 percent of these are naturals. These are concrete buy or sell offers that are time-sensitive and involve a commitment to produce the merchandise specified in the message.
The other 80 percent represent the flip side of the coin. These lower-commitment messages run the gamut from near natural-quality IOIs to speculative fishing.
Fishing is industry-speak for using IOIs to get other firms to reveal their supply of, or demand for, a certain issue. Here, the IOI is used as an intelligence tool, which can be frustrating to those firms on both the buyside and sellside that are attempting to complete actual trades.
Mixed Blessing
For institutions, FIX is seen as a mixed blessing. Few doubt it as a worthwhile concept, offering the promise of expanding real opportunities for trading and monitoring interest in particular stocks.
Unfortunately, as FIX's popularity expanded, controlling message traffic and quality became an issue. The huge volume of variable-quality messages has left many institutions scratching their heads about what to do with their FIX-compliant systems. Expecting FIX to deliver a comprehensive, high-quality messaging network, these firms have found their FIX implementation falling short of expectations.
What needs clarification is the reality of FIX. FIX is just a protocol. It does not, by default, mean that information transferred over networks that are FIX-compliant is any better or more real than if information were transferred some other way.
While an investment manager's trading system may utilize FIX, the quality of the IOIs it receives is only partly a result of this fact. It more directly results from the investment manager's willingness to police its own communications network, insuring that the messages it receives are legitimate buy and sell offers.
FIX simply offers the manager another set of parameters within which its trading parties must comply.
Bottom Line
At least one of the largest investment managers is quite clear about its IOI policy. The bottom line: Brokers must stand up to their indication messages or risk restrictions on their IOIs. The quality of messages this manager receives is aided by its vigilance and its status in the industry.
A top-tier institution with a stellar reputation is clearly at an advantage making these demands of the brokers it conducts business with. This should not be lost on firms moving toward FIX compliance.
FIX should be considered a means to an end, but not the end itself. Robust connectivity, breadth of user base, comprehensive message types and reliability are the desired goals. FIX merely facilitates those goals.
With trading volumes continuing to rise, reliable FIX-compliant networks will be an invaluable tool in handling the increased activity, but also in controlling and streamlining the trade process.
John Spensieri is a vice president at AutEx, a division of Boston-based Thomson Financial (TF). TF is the parent company of Securities Data Publishing, which publishes Traders Magazine.
