Achieving STP in Canada - The FIX Connection

Transcription

1 Achieving STP in Canada - The FIX Connection By Stephen Pesner, Stratix Consulting (left) and Robert Smythe, eclientscope Inc. The current Canadian situation: In a recent review of straight through processing (STP) in Canada by Stratix Consulting, it was concluded that further work is required in Canada to keep pace with global trading markets. According to a study commissioned by the Canadian Capital Markets Association, Canada lags the U.S. by 14 months in moving towards matching trades on trade date. In as much as U.S. and Canadian securities markets are inexorably linked, Canada is focusing on quickly accelerating the institutional trade matching process to ensure it is able to equal its southern neighbour's progress. In addition to lagging on the trade matching front, Canada has also been slower in adopting electronic trading and standards such as FIX. This is primarily due to the concentrated nature of the Canadian financial markets. There are fewer domestic trading venues that need to be accessed in search of liquidity. Canada is however ahead in terms of payments and dematerialization. The Canadian Payments Association (CPA) Large Value Transfer System provides a single national clearing and settlement system for security industry cash settlements. It is a key element in establishing Canadian leadership in payment efficiency. The current priority in Canada is to focus on the institutional marketplace, promoting efficient and timely trade matching among capital market participants. This involves achievement of trade date matching of institutional trades from initiation through to confirmation/affirmation and eventually to include settlement. The current plan is to achieve the institutional trade matching goal by July 2007 with the following milestones: 41

2 AMERICAS Timeline T T+1 Jan % reported to July 06 by end of day Jan 05-75% confirmed / July 06 matched by end of day July % reported to 95% confirmed / Dec 06 by matched by noon end of day Dec % confirmed / end July 07 matched by end of day is 7:30 p.m. of day The use of straight through processing will facilitate meeting these goals; where STP is defined as seamlessly passing financial information electronically - on a timely, accurate, system-to-system basis - to all parties in the endto-end securities transaction chain, without manual handling or redundant processing. Candian Leadership While Canada lags somewhat in adapting FIX on both the buy and sell sides, its exchanges have shown leadership in electronic trading. In 1977 the TSX introduced the world's first Computer Assisted Trading System (CATS) and in 1997 the TSX closed its floor and became an entirely electronic exchange. Direct Market Access (DMA) has been available in Canada since the mid-90s. The TSX uses Securities Trading Access Message Protocol (STAMP) but has not provided FIX connectivity to date. The Montreal Exchange is also fully electronic with FIX connectivity and has a fully integrated clearing and settlement process via its subsidiary, the Canadian Derivatives Clearing Corporation. The Canadian Securities for (CDS) is Canada's national securities depository, clearing and settlement hub supporting Canada's equity, fixed income and money markets. It holds over $2.3 trillion on deposit and handling over 62 million securities trades annually. Virtually all of these securities are in electronic format. CDS also provides an international gateway settling over 14 million cross-border transactions with the U.S. annually and through custodial relationships with the Trust Company, Japan Securities Settlement & Custody Inc., and Euroclear France. CDS provides automated trade matching for exchange, non-exchange trades and has the capability of handling matched trades. Mutual fund order processing in Canada is efficiently handled by FundSERV via the secure transfer of accurate information and the ability to place, reconcile and net settle mutual fund orders using advanced online workflow services based on XML standards. The trading desk and FIX connectivity There is still much to be done at the trading desk to automate the order and confirmation processes. Today much of the communication between parties is via phone, FAX and . Direct machine to machine electronic links between trading systems are not in place for the majority of trades. In a presentation at the FPL Canadian Electronic Trading Conference in June 2005 Sean MacKenzie, Managing Director and Head of Equity Execution Services at RBC Capital Markets, stated that proprietary desktop trading applications such as E*Trade, Belzberg, ITG, Reuters, etc. still dominate the trading desks. He also identified that when FIX is used FIX 4.0 is the most prevalent version with usage focused on IOIs and single trade messages. NYFIX 3% MFN 8% FIX connectivity providers in Canada ATR 6% TNS 8% Other 5% E*TRADE 24% Belzberg 6% Chart by Sean MacKenzie, Director and Head of Equity Execution Services RBC Capital Markets Bloomberg 40% He mentioned that more buy-side firms have implemented OMS in the last 18 months than in the previous 5 years. These have been mainly broker neutral 42

3 OMS solutions from vendors like Advent, Bloomberg, Charles River, FMC, Linedata, Macgregor and LatentZero, all of which have built-in FIX connectivity. His presentation showed that there are many network providers in Canada providing FIX connectivity. So it is not for lack of tools that FIX and STP have not progressed as rapidly in the Canadian securities market as they have in other countries. With use of these enablers increasing, it is expected that FIX adaptation will grow rapidly in Canada. STP is not dead While all may seem quiet in the STP world, much is going on behind the scenes particularly within individual firms. An analysis by Stratix Consulting of key STP components identified the number of pieces in the puzzle that must match in order to have end to end integration. Implementing electronic interfaces between each component is a significant task. Having all the links work harmoniously together to complete the puzzle requires significant industry cooperation. The use of standards such as FIX and ISO to provide the required interfaces is growing in Canada and should make the overall integration task easier. example, brokers must compete for money manager business, and this requires them to accept any form of communication from them. It also stems from a lack of technology implementation, e.g. securities lending is still heavily FAX based. Unfortunately, the many different ways now used to communicate have created a jumble of operational issues. The only way to streamline processes is to reduce the number of communication methods, while adopting a common technology infrastructure. All participants will need to quickly change or be left behind. FIX helps by providing a common language. We don t all speak the same language Payments Key STP Enable Elements Copyright Stratix Consulting 2005 Legal and Regulatory Best Practices Payments IP Communications The importance of messaging standards Imagine the challenges faced by countries with different languages, customs and communication methods trying to Standards FIX ISO on Trade Date Central Trade work together to achieve a common objective. This is not unlike the challenges faced by participants within the securities industry in executing and settling trades. While FIX has taken a dominant position in trade automation, the ISO standard is the most prevalent standard for post Securities Lending Referance Data Dematerial ization Local Trade trade confirmation and settlement. We all speak different languages Canada has two official languages but in the securities industry participants use a myriad of formats and mechanisms to communicate. Lack of standardization is driven by some extent from competitive pressures. For Security trading in Canada is similar to other securities markets, requiring the interaction of many parties, processes and systems. A simplified view of connections between participants identifies the multiple types of interactions between them. A variety of competing and conflicting communication methods and terminology are currently used to effect these interactions and this impedes progress toward shorter trade-settlement cycles. The 43

4 AMERICAS Bank Excgabges Money Manager Institutional Investor Cdn Payments Assoc Mutual Fund Cos Transfer Agent/ Issuer Custodian Fund SERV Mutual Fund Dist Bank Cdn Payments Assoc following examples reflect the types of problems the industry currently faces: Over the last 30 years, the Securities Industry has adopted many conflicting security ID numbers, which range from CUSIP, ISN, Sedol and Stock Ticker Symbol acronyms to proprietary ID numbers for money market and mutual funds. Security trades can be expressed and delivered in various forms, from highly structured messages using STAMP (TSX Securities Trading Access Message Protocol), FIX or SWIFT protocols; to freeform messages contained in fax, and phone communications. The terminology and definitions used to express precisely the same data and business-processing concepts can vary widely from firm to firm, and from country to country. Networks and other communication media used for moving trade and related data messages can vary from telephone and fax to or proprietary networks, all providing data transportation with varying degrees of cost, security and infrastructure requirements. STP-related functions To drill more deeply into the problem it is helpful to identify the four core Security Industry business functions that are of interest from an STP perspective. Each of these functions involves a subset of key industry participants and interactions, as shown below. 1. Trading - buyers, sellers and intermediaries interconnect to convert a trade order into an executed trade, ready for settlement. 2. Investment Management - Investor portfolio management and trade decision making to create a trade order 44

5 3. Mutual Fund Manufacturing, Recordkeeping and Distribution - fund creation, marketing, distribution and unit holder recordkeeping of mutual and pooled funds for institutional and retail sales. 4. Trade Settlement and Custody - settlement, allocation and portfolio recordkeeping for buyers, sellers; security issuers; depositories The buy and sell-sides of trading The terms Buy Side and Sell Side are commonly used to distinguish between the types of participants involved in institutional trading. The Buy side tends to be money managers and mutual fund companies - those looking to place new incoming funds or rebalance existing portfolios, the Sell side tends to be brokers and dealers - those looking to fill trade orders submitted by the buy side. Each side has its own set of core business processes that must interact to convert a trade order into an executed trade that is ready for settlement. Most of the interactions are in the form of messages communicated from a process on one side to a corresponding receiving process on the other, and in most cases occur on a continual basis throughout the day. As Canadian investment manager interest in markets beyond Canada grows, due to recent changes in regulations that now allow Canadian pension plans to hold up to 100% foreign content (previously limited to 30%), the increasing need to trade in these venues may require interfaces directly with principals in these markets. All of this involves a mix of message formats and media. Some business processes may be electronically connected while others may still be manually linked via phone calls or fax. The reality is that each side can only communicate to the level of technology and message sophistication available on the other side, forcing communication to the lowest common denominator of technology and message standard. Any given Buyer and Seller will typically be linked to numerous counterparties, driving them to use a multitude of communication methods, e.g. price discovery via phone CSA Street - Sell Side Institutional - Buy Side Mutual Fund Cos Exchanges Money Manager Investor CPA MF Dealers Transfer Agent/ Issuer Custodian FundSERV DTCC Money Manager Investor Bank CPA CRA 45

6 AMERICAS or FIX and order allocation via , Excel spreadsheets, FMCNet or Omgeo, or all of them at once! Sell Side - Dealer Price Discovery Trade Order Strategies Order Flow and Routing Trade Execution Trade Order Admin Order Allocation & Security Positions & P & L Business Process Messages between the Buy and Sell Sides Standardization and FIX Buy Side Money Manager Portfolio Performance Investment Strategies Trade Order Strategies Investment interest broadcasting Trade Order requests Fill Details Order Allocation and Portolio recordkeeping An underlying premise of electronic trading is that communication between buy and sell sides can be significantly improved through the use of structured electronic messages specifically designed for securities trading business processes and their data requirements. Such messages would correspond to each relevant Buy and Sell-side business process, and would be designed with consideration of other trading participants that support and perform trade execution and settlements, such as exchanges, depositories, reference data vendors, clients, s and custodians. To achieve STP, such electronic messages would go directly from one participant's business process application to another participant's application, machine to machine, without any re-handling of data, its attendant delays and introduction of errors. The message sources and destinations would electronically speak to each other in the same language. This is where FIX comes into play. The FIX Protocol defines and organizes data associated with specific trading business processes into predefined message formats. Where both the source and destination (Buy and Sell side) adopt FIX for a specific business process, integration can be seamless between them. Currently in FIX version 4.4 there are approximately 80 FIX business messages covering over 900 fields that can be used between buyers, sellers and supporting participants. Trade Counter - Party FIX Workflow Function Messages Blocks for Sale Client Exchanges Reference Data Vendors - Dealer IOI NOE Allocations Trade Order Request Match error & amends Money Manager Central/ local Reference Data Vendors Trade Fills Central/ local Matched Trades Central/ local Custodian Matched Trades 46

7 Moving towards standards-based electronic interaction In order to accelerate the trading process and move towards matching on T, common electronic-based messaging standards like FIX and ISO will have to be implemented across all industry participants. While progress in achieving end-to-end solutions throughout the industry has been slow, the tremendous interest at the FPL Canadian Electronic Trading Conference 2005 this June, with over 350 attendees, indicates that momentum is growing. The increase in the use of trade order management systems, the growth of hedge funds and algorithmic trading and the need to reduce risk and demonstrate best execution for both domestic and foreign trades will stimulate interest in STP and standards like FIX. As portfolio performance becomes harder to achieve, interest in utilizing the most effective trading approaches and most efficient back office processes will grow. This challenge is compounded by the growing amount of information that must be received, filtered and acted upon often with lighting speed. Managing this information can no longer be done effectively using manual processes. As the securities industry automates trading and settlement processes from end to end it is becoming clear that this cannot be totally accomplished without automating the handling of market, reference and entitlements data. The data standards are still evolving so this adds to the challenge. Regardless, anyone undertaking an STP initiative without a data management component will not be fully successful. In Canada institutions such as the TSX and CDS who are already major sources of market data, corporate actions and entitlement information are looking at further opportunities to effectively package and distribute it to meet industry needs. CDS today sells feeds from SEDAR (SEDAR is similar to EDGAR in the U.S.) and SEDI (System for Electronic Disclosure by Insiders) that CDS operates on behalf of the Canadian Securities Administrators. This is different from the U.S. as the regulators in Canada have allowed CDS to commercialize the data to help defray the cost of operating these systems. In addition many vendors, who sell, distribute, reformat and verify information used as part of the trading and settlement process are making their capabilities known to the securities industry. operations staff, but will see portfolio managers and traders demanding it. They are realizing that their future success will require seamless electronic process so they can focus on investment and trading strategies and not on the associated processes. At the FPL Electronic Trading Conference 2005 in New York City at the beginning of November, investment managers provided examples where after implementing STP processes portfolio managers were able to manage 40% more assets and increase trading capabilities by 300%. Revenue increases of 30% and expense decreases of 6% were achieved. The net result was that profits doubled. Achievements like this provide a major competitive advantage. In Canada most of the STP focus has been on enhancing back office processes. While this is important it is becoming clear that to keep up with the efficiency and profitability gains that are being achieved south of the border, more focus on automating front office processes is essential. The FPL Canadian Electronic Trading Conference 2006 that is planned for May 2006 in Toronto will contribute to enhancing the efficiency and performance capabilities of Canadian securities market participants. The Conference will focus on achievements by industry leaders and future opportunities for Canadian security industry participants with respect to performance, risk, compliance, electronic trading, data management and enabling solutions. Our reading of the mood in Canada is that the capital markets participants are determined to keep Canada at the forefront of electronic trading and straight through processing. FIX Any thoughts on this or other articles Please send any comments, refering to this article as Vol 1 Issue 8 AM4, direct to Edward at edward@fixglobal.com Achieving end-to-end electronic process will no longer be of interest only to information technology and 47