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In this article, Mike O’Hara publisher of The Trading Mesh, asks Brian Ross and Jim Timmins of FIX Flyer, Sassan Danesh of Etrading Software, Robert Bath and Stef Weegels of Digital Realty and Toby Corballis of Bridline to consider the future role of managed services in increasing the efficiency and reducing the cost of the FIX connectivity infrastructures of banks and brokers..
For many securities market participants, FIX is part of the furniture. Starting life over two decades ago as a standardised messaging protocol for conveying orders between large asset managers and their brokers, FIX has become ubiquitous. It has continually evolved to enable higher volumes and greater detail to be carried along electronic pipes between trading counterparts in the equities markets. Moreover, FIX has expanded its horizons and those of its users. Under the guidance of the FIX Trading Community, the not-for-profit standards body that maintains and develops the protocol, FIX is now reaching new asset classes and further along the transaction value chain, deep into the post-trade arena.
Such expansion is to be welcomed. A standardised messaging protocol can provide the building blocks upon which service providers can add new value to a global financial markets community in urgent need of workflow efficiencies. But these new frontiers for FIX also offer an opportunity to reassess existing FIX implementations, many of which could benefit from root-and-branch rationalisation, and to consider emerging service models.
In facilitating an increasing volume and variety of trading-related communication, FIX has become a victim of its own success, stretching well beyond its initially envisaged limits. “The power of FIX is in its flexibility. But firms have customised more than was necessary, which has led to considerable complexity,” says Jim Timmins, COO of FIX Flyer.
“Once I’ve used today’s technology business rules to establish a new platform, it is much easier to migrate a legacy platform to it.”
Jim Timmins, COO, FIX Flyer
When most firms first implemented their FIX infrastructure, they typically connected to a handful of core counterparts. At that level, it was easy to accommodate minor differences in configuration or customised tags. But as the utility of FIX increased, small differences in rules of engagement (ROEs) rapidly became an unwieldy spider’s web of exceptions, embedded deep in the coding of a firm’s communications infrastructure. A further problem with becoming part of the furniture was declining visibility. Over time, firms’ FIX infrastructures were asked to perform more of the same core tasks, with little thought given to upgrades and improvements. New connections were implemented over the years by a succession of staff, often with little consistency or record-keeping. Because previous ROEs were so customised, it became safer to start from scratch when onboarding a new customer. Legacy connections remained untouched for years.
In extremis, the complexity of a bank or broker’s FIX infrastructure has become a barrier to growth, rather than an enabler. A technical issue very quickly becomes a business problem if a firm cannot onboard a client for another six weeks because of a combination of over-complex connectivity processes and over-burdened staff.
Furthermore, advances in technology have overtaken some of the customisations previously built into brokers’ FIX infrastructures, rendering much of their connectivity framework obsolete, says Timmins. “Today, there are a lot simpler solutions. And if I rebuild today, I can then focus on my new sources of revenue. Once I’ve used today’s technology business rules to establish a new platform, it is much easier to migrate a legacy platform to it.”
For many firms, the broadening of the scope of FIX to new asset classes and workflows is the right time to weigh up the cost considerations of continuing to maintain FIX through internal, sometimes non-specialist, and always over-burdened IT resource, versus alternative, outsourced, approaches.
Experience suggests new implementations can be a catalyst. Sassan Danesh, managing partner at Etrading Software and co-chair of the global fixed income sub-committee of the FIX Trading Community, has been working on a project which demonstrates the opportunities and challenges of the FIX protocol’s expansion. A key part of the Neptune project is the development of new message standards for sharing information about the corporate bond inventory held by buy- and sell-side institutions. Perhaps surprisingly, Danesh found that fixed income was not a ‘green field’ site for a new streamlined approach to FIX implementation.
“Banks can see the benefit of outsourcing the management of the network to a third party.”
Sassan Danesh, managing partner, Etrading Software
“When establishing new workflows, we created specifications in FIX version 5.0 (introduced in 2006), which were ratified by FIX committees and backported to 4.4 and 4.2. While brokers were willing to implement the new messages using version 5.0, in part because they managed their FIX connectivity internally, some asset managers expressed a preference for version 4.2 or 4.4, mainly because firms’ FIX connectivity relied on a range of third-party technologies, much of which used earlier versions of the protocol,” he says.
In other ways, however, users are taking next FIX-based projects like Neptune as an opportunity to break from the past. Banks were given the choice of using their existing FIX infrastructure to connect directly to clients or communicating bond inventory information via a managed service, the Neptune network. “The consensus was overwhelmingly in favour of the concept of a managed service, a network where costs can be shared, with an external party managing the FIX network. Historically, the tendency would have been to add another layer on top of their existing FIX infrastructure, but banks can see the benefit of outsourcing the management of the network to a third party,” says Danesh.
Faced with a complex, legacy FIX infrastructure, banks and brokers are looking at a range of approaches to reduce costs and improve efficiency, from streamlining connectivity to adopting best practices to outsourcing to third parties.
New approaches to network management can lay the foundations for greater efficiency and flexibility, according to Robert Bath, vice-president, global solutions, Digital Realty, a developer and operator of data centres. Due to the static nature in which connectivity is currently managed between the FIX infrastructure of banks and brokers (i.e. static assignment of unique TCP/IP endpoint identifiers and static and manually operated databases), significant operational complexity and impediment to change burdens the network. “Improved operational simplicity (via network abstraction and ‘single pane of glass’ monitoring) and provisioning agility (through effective automation and orchestration techniques) can underpin the evolution of connectivity services in support of both real-time execution via FIX and the requirements of new asset classes,” says Bath.
At a granular, software layer, firms can simplify FIX connectivity via increased automation, for example streamlining certification to reduce the effort required to onboard counterparts and to monitor customisations subsequently. Recent progress toward machine-readable ROEs offers the prospect of automated comparisons and alerts to outliers and exceptions, rather than the time-consuming process that has been required to date.
“Improved operational simplicity and provisioning agility can underpin the evolution of connectivity services.”
Robert Bath, VP, Global Solutions, Digital Realty
“The ability to automatically compare ROEs could put us on the road to a long-held goal: an industry-standardised ROE for equities,” says Brian Ross, CEO of FIX Flyer. “Beyond machine-readable ROEs and comparison tools, the industry also is looking to the development of progression testing tools and release management tools. Overall, we’re seeing a more mature interaction between counterparties.”
In the absence of a central register of ROEs, standardisation may be best achieved by encouraging the industry to move to an operating model that minimises the impact of different ROEs through automation and abstraction, agrees Toby Corballis, director of specialist consultancy Bridline. “Work needs to be done at several different levels to reduce the dependence on people in the process,” he says.
In a world of steeply rising capital costs for banks, notably under Basel III, the capital and operating expenditure of running a commodity service such as FIX connectivity is going to come under increasing downward pressure. “Firms are already looking at infrastructure on demand, software on demand to solve their cost issues. The time is right for vendors to offer FIX on demand,” says Timmins.
“Infrastructure-as-a-service makes a lot of sense for people who want to control budgets.”
Toby Corballis, director, Bridline
The increasing maturity of managed service offerings such as FIX service bureaux that deliver both tools and expertise via the cloud let banks and brokers outsource much of the management of FIX connectivity. Sell-side firms have traditionally been cautious of sourcing services via cloud technology, but information security concerns have largely been addressed by multi-vendor data centre services and the firms they host. “Firms that offer infrastructure-as-a-service or software-as-a-service have been upgrading their systems and infrastructures to pass muster in respect of information security,” says Timmins.
Service bureaux can eliminate the historical duplication of effort involved in managing FIX connectivity by deploying dedicated expertise and robust, road-tested processes. If a service bureau has already connected one buy-side client to a particular broker in line with FIX-recognised best practice, it can clone large parts of that connection for other asset managers. Cloud delivery, of course, means services can be drawn down as and when required.
Stef Weegels, sales director for EMEA at Digital Realty, says the range of hosting choices and related service options offered by FIX service bureaux will be enhanced if located at a data centre with a strong cloud and FIX community. “FIX-based services can be offered as-a-service, with the significant latency benefits of hosting with a cloud provider in a multi-tenant data centre. The multi-tenant data centre is also the ideal venue for a hybrid hosting strategy, with the base load hosted in either dedicated infrastructure or a private cloud solution, and the burst in the public cloud,” he says.
“The multi-tenant data centre is also the ideal venue for a hybrid hosting strategy.”
Stef Weegels, sales director, EMEA, Digital Realty
Taking onboarding as an example, managed service providers can analyse the logs and existing workflows relating to how a firm manages the certification process and subsequent monitoring of traffic across particular connections. By analysing a firm’s ROEs and other aspects of their FIX framework, and comparing them to industry norms, third-party providers can help sell-side clients identify best practice and move toward a more efficient and less complex structure. “With managed services, a bank can decide to put certain dedicated tools in the hands of their internal staff, or go further and outsource a greater share of the management of their FIX connectivity. Banks can get back to focusing on their core business, spending less time and on managing technology,” says Ross.
Moving towards a software-defined network provisioning platform can provide an effective decoupling (abstraction) of a bank’s connectivity management from its internal network and server farm management. “This has a number of key benefits, most notably, consistency of application performance, geographic agility and scalability and automatic re-direction of client connections to disaster recovery sites of choice for mission-critical FIX applications,” says Bath.
Although managed services are gaining acceptance for a wider range of uses across the financial market, Bridline’s Corballis suggests it is too early to be certain which models will have the most impact on the FIX connectivity market.
“Infrastructure-as-a-service makes a lot of sense for people who want to control budgets and have the ability to flex up and down depending on need. Platform as a service has been around for a while but offerings are becoming more specialised and as such can serve to create pools of FIX standardisation. I also expect to see an increase in specialist FIX network-as-a-service models to complement the two other models,” he says.
As firms seize the rationalisation opportunities arising from new implementations of FIX, the future challenge for the whole industry remains one of maintaining a balance between flexibility and standards to avoid the complications in the past.
According to Danesh, the FIX Trading Community has focused a lot of effort in recent years on the establishment of best practice, reinforcing recommended methods for using the protocol. “There are always good reasons for customising FIX to a firm’s individual needs, but our sub-committees are working with users, first to forge industry agreement on best practice, and then to support implementation. The cause of standardisation has been helped by the fact that banks no longer see FIX connectivity as a point of differentiation and are willing to seek outside help in implementing changes to – and then managing – their FIX infrastructure,” he says.
The development of new FIX messages under project Neptune to support the automation of voice-broked, over-the-counter markets such as fixed income and swaps is an example of the FIX Trading Community’s approach. “As workflows become standardised, they become automated and best practice can be established and reinforced. For Neptune, we have documented standardised workflows around inventory distribution and will look to maintain that level of documentation and standardisation as new workflows evolve,” he says.
Danesh accepts that there are no hard and fast rules paving the way from innovative work flow to industry standard functionality to commodity widget, thereby identifying the optimal point at which the industry should follow the same rules for a particular task. “It is a matter of establishing consensus and FIX committees are a very good environment to bring that about,” he says.
The challenge of upgrading a FIX infrastructure grows the longer the task is put off. The number of connections for a major broker means a full upgrade could require a multi-year project plan and a rock-solid business justification.
A key problem that can delay upgrade projects is that many banks and brokers do not have transparency on the cost or efficiency of their FIX connections. If it is hard to establish which connections are most efficient or inefficient, it will be even harder to work out which areas of your FIX infrastructure are in most in needed of attention. “Many firms do not have the ability to interrogate log files. The sell-side really needs to know who are their best clients, who are their best connections, how can they make certain connections more streamlined. Equally, they need to identify the connections that are losing them money, either because of the ROEs or simply a lack of trading volume,” says Ross.
“Do you really want to pile FX or fixed income trading on top of your existing FIX capabilities?”
Brian Ross, CEO, FIX Flyer
If connectivity is a commodity, managed connectivity services are not. As well as the analysis and expertise they can bring to the onboarding process, service bureaux are competing to reduce banks’ total cost of ownership of their FIX connections by highlighting the costs of licensing, implementing and monitoring. Most have developed the capability to read log files for firms and provide reports on the efficiency of their connections. “Banks are looking to vendors to add value not just in terms of monitoring connectivity but in areas such as managing trade flows, using heuristics to predict changes in the market. The data is increasingly becoming available to enable firms to assess how market events will impact the cost-effectiveness of their FIX infrastructure. The next question is: “Do I need to own those tools? Do I have someone else run those tools for me?” says Timmins.
In many cases, FIX connectivity remains under the control of banks’ equities teams, because the electronification of trading in that asset class was the process FIX was initially designed to support. Two decades or so later, it may not be efficient for their fixed income colleagues to leverage that existing infrastructure, especially if it has been under-resourced in recent years.
FIX is moving forward. The industry is asking it to meet new needs and the FIX Trading Community is responding. But banks and brokers with outdated FIX infrastructures risk falling behind. As FIX is used for a wider range of workflows – both in the post-trade arena and for trading a wider range of instruments – such firms will face increasingly urgent questions about the viability and cost of their FIX connectivity infrastructure. “Do you really want to pile FX or fixed income trading on top of your existing FIX capabilities or does that become an opportunity to start a fresh implementation to which you can then migrate your existing equities connectivity in due course?” posits Ross.
