Fix vendors are finding that customers want more than just a front-office solution. In response, they are beginning to embrace the world of back-office protocols as well.
As industry initiatives like T+1 force straight-through processing to the forefront of everyone's IT priority list, it has become apparent that harnessing the power of protocols is paramount to a firm's long-term success. If STP is to become a reality, it is the collective use of common protocols that will allow systems to interact with systems and counter parties with counter parties, enhancing the speed and accuracy of trading, allowing for T+1 and, eventually, T+0.
In the front office, where activities such as indications-of-interest and executions take place, the dominant protocol has been Financial Information Exchange or FIX, which allows buyers and sellers of financial instruments to trade securities electronically, absent a telephone or fax machine. Though manual means of communication still far outweigh any form of automation, those that move to electronic-transaction processing undoubtedly choose FIX.
As the industry pushes towards a one-day settlement cycle (now slated for 2005), that adoption of technology is becoming more prevalent, and with it the FIX space more competitive. Dominant firms like Javelin and Financial Fusion find themselves competing with providers like Transacttools, Cameron Systems and Silicon Summit which are looking to dislodge them.
Javelin has been in the FIX space the longest and, in fact, many industry insiders credit the company's chairman and chief executive officer, George Kledaras, with creating the FIX space by trumpeting the standard before most knew what it was all about. But being the first and having the most clients means being a target for everyone else to fire at -- now, perhaps more than ever, some say that client list is ripe for the picking.
In April, the firm came out with a new version of its FIX engine called Appia, which is intended to move beyond the speed and functionality limitations of its former flagship engine, Coppelia. Some claim the conversion to Appia, however, is akin to switching products altogether, rather than a simple upgrade from one product version to its most recent release.
"Javelin is trying to migrate customers from Appia to Coppelia, which is also providing an opportunity for competitors," says Fritz McCormick, an analyst with consultancy Celent Communications, who recently authored a report on the FIX protocol. "Javelin is in a position where it is working to show the value of Appia and quickly bring about the migration process in hopes of keeping other smaller competitors away who want to poach."
According to Javelin, only 15 percent of its Coppelia customers have moved over to the new product, which was designed to handle greater message throughput and, while supporting FIX, become protocol independent.
John Cameron, founder and chief technology officer of Cameron Systems, a FIX-engine vendor, suspects most Javelin clients are reluctant to be first on the new Appia product, preferring to let others grapple with any bugs that might lie in the system. "There's an old saying in the computer world -- never buy version 1.0," he says.
The move by Javelin, and others, to become protocol independent in their new products is another sea change in the world of FIX vendors. Reasoning that one can no longer simply focus on FIX and survive because firms now need many protocols to support their different business functions -- such as in derivatives (FPML), market data (MDDL), or back-office functionality (SWIFT) -- vendors are branching out.
Back office, or clearance and settlement functionality, is dominated by the Society for Worldwide Interbank Financial Telecommunications, or SWIFT, which has called its own protocol tune, recently mandating that all customers convert to ISO 15022-based messages by November 2002 (See Inside Operations).
Also, it has been announced that SWIFT and FIX will work to converge the two standards, resulting in one protocol for front-to-back functionality, a development that could propel the industry much closer to its T+1 goal.
Financial Fusion is also getting into the multi-protocol act. Once a company which focused solely on FIX, the vendor, which is a subsidiary of the database-giant Sybase, is moving to accommodate other protocols on its engine as well. In fact, Financial Fusion recently announced it would be the first FIX-engine provider to link its product into SWIFTNet.
Considering that one of the most onerous tasks in the FIX world is not building or installing the engine but rather establishing and maintaining all the point-to-point connections with trading counter parties, it is not surprising that a one-point connection to SWIFTNet, delivering a global pool of liquidity, is attractive.
"If you wanted today to send out block orders, you are limited to the number of counter parties you are connected to," says Michon Schenck, president and COO of Financial Fusion. "If you are connected to SWIFT, you are only limited to who is on SWIFT, which could be thousands -- so there are pretty phenomenal implications for the industry."
Though Financial Fusion may be the first FIX-engine vendor to gain the green light from SWIFT, it will certainly not be the last. In fact, most vendors are realizing that, rather than cold calling firms and singing the praises of FIX, it's a much better plan to go in through the back door. Sometimes that means convincing an order-management system provider to install your FIX engine at the factory.
In fact, that's just what Javelin recently convinced Indata, a provider of buy-side order-management systems, to do. "We didn't want to do middleware," says Indata Managing Director Dave Csiki.
For Indata, the choice of who to partner with was easy, explains Csiki. Javelin, he says, provides technology more compatible with Microsoft-enabled shops by offering an ActiveX control -- a software module based on Microsoft's Component Object Model (COM) architecture which enables a program to add functionality by calling ready-made components that appear as normal parts of the program.
Having an ActiveX control means Javelin's Appia can easily link with Indata's Precision Trading OMS. Financial Fusion, he says, is targeted to large sell-side institutions with mainframe technology and did not offer an ActiveX control.
"We are focused on the buy side, so if Financial Fusion tried to sell their products to one of our clients, we would not be able to interface with them," he says.
As far as the other, smaller providers in the space, Csiki says that he would not have been comfortable partnering with a firm without a long track record and client list to reference. Csiki's attitude is prevalent in a market where many were burned taking chances during the Internet-boom days of the late '90s. "We didn't feel the other vendors had the organization that Javelin had," says Csiki, "and we didn't want to deal with a start-up that was scrounging for money."
Though Financial Fusion has only been in business since January 2000, it is certainly not your typical start-up. And though the company is now on the verge of profitability (eight-quarters into its existence), says Schenck, it had previously been able to tap Sybase's deep coffers for life-saving infusions of cash.
"Sybase has provided all of the underlying capital and cash to keep Financial Fusion running for the last two years," she says.
Sybase also proved what a loving parent it was by buying Financial Fusion a present last year (New Era of Networks, a tangential competitor to Financial Fusion was purchased by Sybase last February). In doing so, not only did Sybase remove a competitor from Financial Fusion's market but also gave the company 80 additional clients and an advanced SWIFT offering which supported the ISO 15022 messaging libraries.
Larger players like Financial Fusion and Javelin seem to have realized that a focus on the largest financial institutions, while profitable, was leaving a wide segment of the market untapped and smaller players were coming in to fill the vacuum.
Cameron says larger vendors have solutions that are priced way too high -- sometimes half-a-million dollars. "FIX is not rocket science. Some of the solutions out there are like using a sledgehammer to crack a walnut."
Both dominant vendors have now come out with offerings for that lower tier of the market -- Javelin with JavTrader and Financial Fusion with its scaled down Global FIX LE.
And just as the larger players are looking to move downstream, smaller players are looking to expand their operations to move upstream.
Cameron Systems, founded in 1997, recently contracted with two technology companies (Aegis Software in the United States and Evolution in Europe) to provide clients with integration, support and training services. Cameron says the move was prompted by potential clients that needed to be assured of quality, local support before signing any contracts. Being only a nine person shop, Cameron decided to look outside his company for help.
Transacttools, another player in the space, has entered the FIX-engine market almost as an afterthought, originally offering a FIX-certification service used to ensure counter parties are both speaking the same version of FIX. Having recently begun to market its own FIX engine, the company will launch a SWIFT module in the first quarter of next year. To that end, the firm has three people on Working Group 10 (WG-10) to monitor that group's shaping of the ISO 15022 standard.
Another key technology question for the potential provider regards their method of persistence -- the act of backing up orders so they can be retrieved if the system goes down. Persistence is usually done by writing to a database (good for archiving information) or a flat-file (good for speed). Most vendors offer customers the ability to do persistence in whichever way they choose.
"We don't develop over database's like Sequel, Oracle, Sybase or DB2 -- we deliver a library so you can hook in. You can (write to) flat files or solid-state disks, we can integrate for any type of persistence which is different than being tightly coupled," says Sam Johnson, president and CEO of Transacttools.
Financial Fusion, however, embraces writing to a database -- not surprising considering its affiliation with Sybase.
Many think the future will find FIX vendors further facilitating multi-protocol communication -- supporting not only FIX but SWIFT, MDDL, RIXML, FPML, IRML and any other relevant standards that come down the pike. And because one of the main desires of financial institutions is one-stop shopping, the trend to integrate with OMS vendors and networks like SWIFT will also continue.
Schenck adds, "In our experience of selling FIX, it is few and far between that customers are only interested in FIX for FIX itself."