Low- and mid-tier investment managers, notorious for tech spending only when they have to, are finally jumping on the FIX bandwagon.
While large buy-side firms made the investment in Financial Information Exchange years ago, small and mid-size investment-management firms are finally starting to adopt the standard en masse.
Over the past few months, a number of smaller buy-side firms have hooked up with vendors to automate trade communication with their sell-side counter parties using the industry's dominant standard, FIX. Developed in the mid-1990s, FIX is finally being embraced by lower-tier players whose budgets demand they be absolutely sure before investing in the latest and greatest technology. That cautious attitude stands in stark contrast to large investment houses that have the ability to take a chance on a new technology.
Pzena Investment Management
One such firm that recently decided to invest in FIX is Pzena Investment Management, a New York-based buy-side firm that FIX-enabled its trade-order-management system to keep up with growing volumes.
Over the past few years, Pzena has gone from $1.3 to $3.1 billion under management, making it imperative that the firm embrace technology to handle the sharp increase in trading. As a first step, Pzena went live on the Precision Trading order-management system from Indata at the beginning of 2002 and recently acquired FIX functionality from an Indata partner, NYFIX (owner of Javelin).
Pzena, which trades with about 25 broker/dealers, didn't have to do the usual FIX testing with its counter parties because those firms were already part of NYFIX's community of FIX users, says Keith Komar, principal, portfolio administration, Pzena Investment Management.
"I just sent one test message (with each broker) and haven't had a problem yet," he says.
The addition of Financial-Information-Exchange capabilities will allow Pzena to communicate trade information with its broker/dealer counter parties more efficiently, obviating the need for traders to use the phone or fax, according to Komar.
The difference is that previously"a trader would get an order (from the portfolio manager) and get a broker on the phone, clock the order and then wait for a call back," says Komar. Then, following verbal confirmation of execution, the trader would have to key that trade into Omgeo's Oasys product which is used to communicate allocation information with the broker.
"Now that we are FIX enabled, we can completely do away with that phone call," he says. That means faster trade cycles, greater straight-through processing and less chances for human errors.
"We are working to get the human side out of processing trades," says Komar.
Komar adds that getting FIX-enabled opens a number of doors to his firm, including electronic-communication networks (ECNs) and other all-electronic matching destinations.
Rob Hegarty, vice president of securities and investments at TowerGroup, a Mass.-based consulting and research firm, was on the FIX executive committee in the early 1990s when the idea of establishing a standard was first bandied about. At that time, Hegarty was with Fidelity Capital Markets, the sell-side arm of investment-management giant, Fidelity.
Hegarty says there is good reason that FIX has evolved from an abstract concept into the dominant trading standard in the industry. "The first reason it has caught on is the need to be more efficient, and now enough of the industry has adopted FIX so that those that are not using it are at a disadvantage," he says."Secondly, there are more vendor solutions available."
Hegarty explains that there are three parts to being FIX capable. The first requirement is an order-management system, the second, a FIX engine, and the third, a FIX network."The FIX engine takes transactions from the OMS and either drops them off or picks them up from the network."
When hitting the market, he explains, firms will find that some vendors offer one or two pieces of the puzzle and some offer all three.
Ariel Capital Management
Another mid-sized asset-management firm that recently turned to FIX is Ariel Capital Management which counts $10 billion in its coffers. Ariel wound up choosing to work with Macgregor (the other finalist was Charles River Development) after an informal search because Macgregor had experience working with Ariel's portfolio-accounting system, Security APL from CheckFree.
Ariel will be using the Macgregor Financial Trading Platform which offers portfolio management and compliance, as well as Macgregor's FIX network. Macgregor, says Hegarty, offers all three pieces of the FIX puzzle.
Roger Schmitt, chief information officer with Ariel Capital Management, says that he hopes to trade with at least 50 of his 65 brokers using FIX."In general, FIX will help reduce the time we spend on the telephone and the fax," he says.
TowerGroup's Hegarty says that Ariel, with its 65 broker relationships, is a good example of a firm ready for FIX."FIX is good for firms that have a high volume of trades and have a large broker universe," he says."FIX becomes a requirement when you are dealing with dozens of brokers and doing hundreds or thousands of trades."
Cheryl Cargie, a senior vice president and head trader at Ariel Capital Management, says that, right now, Ariel is"heavily paper based." Currently, portfolio managers at the firm e-mail position changes to traders who print out paper tickets, communicating orders with brokers via phone or fax. That means there is no electronic means for storing executions and average price.
The situation should be remedied with the Macgregor platform, she says. The Windows-based system will allow Ariel to match up indications of interest with orders on Ariel's blotter, store executions as they come in and create reports"on the fly," says Cargie.
Despite getting automated, Cargie says she will still elect to conduct some business over the phone, such as very large orders or trades of illiquid stocks. She is, however, looking forward to automating most trades."It will be wonderful to have small programs for 100 share lots instead of doing them all verbally," says Cargie.
Schmitt says he expects the implementation to be done in April.
Hegarty adds that by automating most of the"clerical" or basic trade communication, buy-side firms can talk to their brokers in a more"value-added" way - learning, for example, about the current"color" or direction of the market. He says that firms considering investing in FIX can frame the debate in this way:"If you have maxed out your traders' capabilities, it may be better to automate with FIX than to add another trader," he says."The implementation of FIX may be a more cost-effective solution."
Cargie says her motivation for moving to FIX is to avoid being left behind." I'm trying to get where everyone else is," she adds."I think that FIX is where the industry is heading and, to be on a level playing field, that is where you have to be."
FIX & The Bond Market
It is well known that the fixed-income markets have been slower to adopt electronic trading than the equities markets, but industry officials are hoping that will soon change with the advent of Financial Information Exchange's version 4.4.
The introduction of a FIX version that includes fixed-income functionality is also expected to propel the fixed-income markets straight-through-processing initiative. (see Feature Story ) Discussion around these themes was top of mind at the Worldwide Business Research's TradeTech conference recently held in London.
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.