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FIX’s Post-Trade Play

Does FIX 4.4 have the potential to disrupt Omgeo's dominance of the post-trade space?

A recent study by CityIQ, a London-based consultancy, contends that the latest release of the Financial Information Exchange (FIX) protocol will soon be an alternative to firms using services like Omgeo for post-trade communication among broker/dealers, investment managers and custodians.

Among the study's claims are that, by using FIX 4.4 in the post-trade space, "savings at average firms (will) likely be in the region of $125,000 annually ... " and, "The payback period is likely to be less than six months."

The study was commissioned by SolutionForge, a provider of FIX-based solutions, and did not look at transactions between U.S.-based financial institutions because of the DTCC's role in domestic trading.

John Wilson, the CityIQ director who led the research, says that, while there are some challenges to using FIX instead of a service provider like Omgeo in the post-trade space, there is a large cost-savings potential. "There is an invoice that you are paying today that you don't have to be paying tomorrow," he says. "You can substitute a service you pay for with a service you don't."

Others contend it is far from that simple.

Kathy Ball-Toncic, executive director of the Global Partners Program with Omgeo, says there are many features a service like Omgeo provides that a firm would have to manage separately if it chose to use FIX, without the support of a vendor, for post-trade communications.

"You can have a musical score, but if you don't have a piano or someone to sing then you don't have music," she says. "FIX is a protocol. Omgeo is the software and solutions that bring the protocol to life."

Tim Lind, senior analyst with Massachusetts-based TowerGroup, says that turning off Omgeo is not a real option for many firms because of the expense and work involved with assuming the behind-the-scenes services such vendors provide.

First off, to totally rely on FIX, a firm needs to buy a FIX engine. Then, the firm would need to contract with a telecom company, like Swift, to establish its network, suggests Lind. Once that's done, the firm also has to build or buy an internal-matching engine from a vendor like SunGard, Checkfree or SmartStream, he says.

"No one is providing free matching," notes Omgeo's Ball-Toncic. And what would matching be without a sound exception-processing system that can take the incoming FIX message and match it with a firm's internal version of the trade details. "Everything is great on the sunny days," she adds.

Additionally, a firm would have to assume responsibility for testing its FIX connections with each and every counter party it had and maintaining those connections over time. Also, not to be forgotten, new versions of the protocol would require upgrades and retesting with each counter party.

But what may be the biggest challenge to firms leaving the Omgeo nest is finding an alternative to the powerful SID and Alert databases which are populated with more than 4.6 million broker internal-account numbers (BIAs) and 150,000 investment-manager accounts.

Lind says cutting off Omgeo is not a simple proposition. "The telecom piece is administered by Omgeo, there is no certifying end points that firms have to do, no version control, no maintenance. Sure, you pay for all that but when you swap out that environment you still have to pay for it. FIX unbundles those costs but doesn't make them go away."

Despite those considerations, Teri Humphreys, head of market operations with U.K.-based Baring Asset Management, an investment manager with 20 billion pounds sterling under management, says that FIX may, ultimately, provide another way to handle post-trade communications. "Though it is possible, we're a fair way away from being able to replace back-office functionality with FIX," she says. "But there is no reason that you cannot have that objective for the future."

Humphreys says there is a "lot of buy-side interest" in FIX for the back office, with the only real limitation being a the fact that existing order-management systems would need to be fitted with internal-matching functionality.

While Humphreys aggrees with Ball-Toncic that FIX and Omgeo are not truly competing with each other, she says that, "FIX opens up the market to other vendors to nudge into (Omgeo's) space. There are a lot of potential FIX providers out there."

CityIQ's Wilson says that most firms, especially in Europe, would be able to leverage their Swift connections for communicating FIX allocation and confirmation messages.

Swift users interested in handling their post-trade communications without the help of Omgeo could potentially leverage the network to send 4.4 messages when Swift upgrades from 4.2 by the end of the year (Swift never moved to 4.3 due to a lack of customer demand).

Matt Fox, director of FIX with Swift, says "Certainly, the release of 4.4 means that the value for local matching seems to be getting stronger. Whether or not that is going to unseat Omgeo or cause people to look closer at the financials around the (local and central matching) models, I don't know."

Swift, however, has been enhancing its service offering in this space by pre-certifying FIX vendors in the marketplace. That way, a firm can make sure a potential FIX-engine vendor is ready to plug into the Swift network and play FIX messages right away. To that end, firms using FIX to connect with counter parties do not have to engage in the onerous testing that usually must take place before exchanging information. Currently, though, Swift does not offer central matching or a direct link with Omgeo, so firms would still need a matching solution of their own.

Wilson yields that even if there is a high rate of FIX adoption, firms will probably maintain their Omgeo relationships for some time and "continue using the Alert service until a better solution comes along."

Barring's Humphreys adds, "I believe there is a historic desire from some segments of the market to move from the Omgeo-type model. But I think the solution is to work with them rather than against them because they do have the market share."

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