In an ever-changing global environment, Brian Ross, CEO of FIXFlyer, examines FIX and connectivity across emerging exchanges.
Technologies used in Direct Market Access (DMA) are changing rapidly, especially in the world’s growth markets such as Brazil, Mexico, Istanbul and India. Brokers provide their clients with Direct Market Access in order to give them a path to the market venue, without going through the broker’s OMSs.
As technology evolves and exchanges increasingly offer more technology in order to capture the interest of automated traders globally, local market structures are changing, and the regulators are responding by making appropriate changes. Many exchanges are copying the exchanges in North America and Europe by offering co-location services, which have been a great driver for revenue for the market venues. And by extension, exchanges worldwide are opening up to the idea of sponsored access, meaning letting the broker’s client connect directly to the exchange, as long as there are appropriate risk controls set up to stop the client in the event of trading that is not acceptable by the exchange.
What exchanges are realising worldwide is that they should cater to the buy-side’s technology to facilitate connectivity. And the buy-side will speak FIX across asset classes and all over the world. Making it easier for buy-side clients to have direct access with the exchange is quickly becoming understood to be a way to support new types of trading, directly from market participants.
Drop Copies to the OMS
The biggest architectural change that DMA attempts to solve is to avoid the path of the messages from the asset manager to the market venue having to go through the database.
A DMA gateway will avoid any slow database writes, and get participants to the market as streamlined as possible. It is still possible to keep a record of trades by sending a copy of the messages from the DMA Gateway to the OMS. This means that you can greatly offload the OMS while providing clients with a more direct path to the market venue.
It’s important to note that an OMS doesn’t need to be upgraded in order to support high speeds. The DMA gateway handles automated order flow while the OMS can continue to be used for care orders, allocations, position management, profit and loss calculation and back office processing.
See Figure 1 for a system diagram of a DMA gateway architecture.
Real time, instant risk checks are important to keep the integrity of an exchange’s market structure intact. Most exchanges go beyond the risk checks mandated by 15c3-5 Market Access rules in the US. These checks are designed to minimise the chances a rogue order, or even a pattern of orders, will disrupt trading and, potentially worse, jeopardise a brokerage business or cause unnecessary havoc in the market. The result is that exchanges and their brokerage members are looking for technology that will check and control risks, but not slow down their latencysensitive strategies and clients.
Some checks that are important are notional value, price and quantity checks, symbology, duplicate orders, stale orders, and cumulative quantity checks.
See Figure 2 for a system diagram of co-location.
Some exchanges are relatively new to understanding the FIX Protocol. We routinely find that an exchange serves as a utility to match trades efficiently, but sometimes the exchange makes the broker fully understand and manage the nuances in the marketplace and exchange systems. Exchanges can be very reticent to upgrade their technology and many core matching technologies were designed before the FIX Protocol was as widely adopted as it is today by trading venues. Native APIs are very common at exchanges and often FIX layered on top of the native exchange protocol. Translations are often not limited to a stateless change of encoding, but involve a semantic translation which is more complex and, more importantly, has a negative impact on performance.
Frequently, there is an additional translation that occurs between the exchange’s interpretation of FIX, then another by the broker, and yet another by their buy-side clients. As exchanges move to eliminate latencies, through colocation and sponsored access, these market adapters must be finely tuned to optimise this translation. Even if the buy-side and exchange have adopted FIX, we have found that it is necessary to translate order identifiers to proper formats and solve race conditions inherent in high-speed exchange systems. Utilising instant translation to make this process seamless with established buyside systems, such as OMS and EMS, is increasingly important to exchanges and markets.
Direct Market Access has a lot to do with the regulation of emerging markets. Each emerging market that we have encountered so far has been very careful to include all potential market participants, such as retail, institutional, algorithmic and high frequency traders. They all realise that markets must be protected in order to help people arrive at a fair price and to facilitate efficient capital markets.
Some exchanges charge a lot for trading, or charge extra for cancelling orders in an effort to control, but not eliminate, high frequency trading. Other exchanges throttle throughput. Some exchanges are considering establishing minimum resting times before cancels or defining speed limits to reduce pileups. Some other markets make it expensive to sell short.
Given the recent issues in the US marketplace, it may be wise for markets to also establish testing guidelines prior to going live, or require kill switches on DMA order flow. It is clear that we must find a balance between maintaining market integrity and facilitating market development and automation.
Case studies: Mexico, Istanbul, India
The Bolsa Mexicana de Valores (BMV) has supported FIX since 2008, and can handle speeds of a few thousand messages per second. Currently the BMV supports FIX 4.4. However, some details are not standard FIX and require the DMA gateway to do/ translations to support the BMV properly. For example, the Client Order ID in tag 11 and Order Status in tag 39 are not standard FIX that a buy side system can support. In addition, there is a race condition in the BMV’s core engine that sometimes results in losing the state of the order and can cause over fills in standard OMSs downstream.
A robust DMA gateway can cure this problem at very high speeds so that algorithms can be handled easily. The new BMV matching engine called MoNeT targets high frequency trading, aims to process orders within 100 microseconds and has a completely new architecture that may solve many of the past issues. Regarding risk checks, today the Mexican regulator, Comision Nacional Bancaria y de Valores (CNBV), requires standard pre-trade risk checks by the broker and where required the BMV as well. For example, a dynamic price check within five minutes of the last price is required to catch any DMA order that is not within 5% of the last price. If the order violates the dynamic price check, then there is an auction for five minutes.
The exchange limits trading to six messages per second for a single native connection, but you can have two connections, plus a special gateway connection that can get you up to 14 trades a second. The Istanbul Stock Exchange is working on a FIX interface, promises to be FIX compliant in the next several months, and is committed to handling speeds for modern algorithmic trading.
Cuneyt Tasli, Managing Partner of Geneks International in Istanbul says, “as a leading provider of OMS software in Turkey, algorithmic trading will be very important in this market. DMA lets institutional investors, especially foreign ones, manage their costs using the same FIX routing, portfolio management, and TCA technologies that are familiar. But for the algorithms to work, the exchanges and the brokers need to adopt uniform latencies and good performances. Another item that needs to be handled is if the maximum lot amount of AKBNK stock, for example, is 5,000 and we receive an order of 100,000 lots, we need to split the trade into suborders, sending them to ISE as if they are 20 independent orders.”
There are three exchanges in India: the NSE, the BSE, and the MCXSX. All three exchanges offer FIX connectivity and co-location services to support DMA. If an instrument trades on multiple exchanges, through permitted trading or cross listing, there are brand new opportunities for smart order routing between the exchanges. One issue with smart order routing in India is that each exchange clears its own trades, increasing the cost to trade on multiple venues, and this could affect the overall cost to run certain algorithms. Another factor affecting broker algorithms in India is the SEBI (Securities and Exchange Board of India) mandated safeguards for pre-trade risk checks, kill switches, and testing which affect the cost of implementation.
With regard to DMA, only the BSE supports FIX 5.0 while the other two support FIX 4.2. On fees, there are no specific DMA fees at any exchange other than colocation fees. SEBI mandates that exchanges restrict or add fees on firms that have order/trade ratios exceeding a threshold. Within this framework, Indian exchanges can manage these restrictions and still achieve their goals.