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Bond Market Hopes FIX will be STP Catalyst

Bond market expects FIX 4.4 to help it make STP headway

It is well known that the fixed-income markets have been slower to adopt electronic trading than the equities market, but industry officials are hoping that will soon change with the advent of Financial Information Exchange's version 4.4.

FIX version 4.4 is expected to be released in mid-February.

The introduction of a FIX version that includes fixed-income functionality is also expected to propel the fixed-income markets straight-through-processing initiative. Discussion around these themes was top of mind at the Worldwide Business Research's TradeTech conference in London this week.

Terri Humphreys, head of market operations, Baring Asset Management, summed up the sentiment around STP in the bond markets by beginning her presentation with, "I told a colleague that I was speaking at an STP conference for fixed income and she laughed at me," alluding to the absence of STP in the fixed-income world.

Despite the slow adoption thus far, STP in the bond markets has been gaining momentum as securities and investment firms continue to seek areas where costs can be captured.

The reason for the more forceful push toward STP for fixed income is twofold: lowering costs and reducing operational errors. Humphreys says that Baring has discovered the cost of a fixed-income trade is 2.5 times that of an equity trade due to the manual processes, as well as the errors that occur.

The resistance is mainly due to the lower trading volumes as compared to the equities markets. As a result, traders don't see as much upside in altering their entire processes for cost savings that may not be as significant as in the equities markets.

Humphreys admits that most of the fixed-income trading at Barings takes place via telephone, however the buy-side firm is looking to implement an order-management system to change that. To make the transition to a more automated environment, Humphreys offers some advice:
1) Define your organizational processes,
2) Define your communications systems, both internally and externally
3) Look at all the options available and
4) Make sure you have a defined overall strategy so that you are re-engineering the whole process all at once.

In order to get there, she notes, "FIX is key and standards are key... . FIX will enable firms to send allocations, enrich them with fees and commission and affirm all details," she adds.

Laura Craft, head of product management, Omgeo EMEA (Europe, Middle East and Africa), agrees that savings will occur. She says, many of Omgeo's broker clients achieved 80 percent STP, with a 20 percent exception rate. Those 20 percent of exceptions equated to 80 percent of the firm's operations costs.

She also noted that one unnamed U.S. firm told her it had 45 people in its back office -- 20 of which were dedicated to fixed income. Conversely, only one was focused on foreign exchange, a more highly automated area. With volumes in fixed income on the rise, there is even more incentive to automate.

Adrian Pearce, head of debt GMI Technology, EMEA, Merrill Lynch, says that there are many symptoms that will make it more difficult to create an STP environment. These symptoms include: static-data sources, use of multiple ECNs, multiple internal client-facing applications and manual intervention. How much will all of this cost? "The more symptoms you have, the larger the investment will be," Pearce says.

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