Electronic Trading: The Next Generation
Can Electronic Trading Help?
Electronic trading means that all aspects of a trade run through an electronic pipeline. It means that the errors inherent in manual processing become a thing of the past; and it means better trading by virtue of greater efficiency and access to more liquidity. Such fluid, industry-wide communication mandates the use of a common communication standard, and for the electronic trading industry, the standard is FIX (the Financial Information eXchange protocol).
On a daily basis, FIX handles the transacting and the communication of billions of shares of stock. Large institutions, exchanges, hedge funds, big broker/dealers, and ECNs implement FIX-based solutions. FIX has proven its value repeatedly as a safe and secure method for the electronic communication of trade data.
While FIX-based solutions are playing, and will continue to play, a major role in allowing institutions to meet the traffic demands of the high-volume/T+1 trading environments of the future, existing FIX technology operates by creating very tight point-to-point connections between trade counterparties. While this type of connection is great, and mandatory, for the large buy-side and sell-side firms, a traditional FIX solution will not work for small- and mid-sized institutions or for the retail investor, which means that innovations are necessary for T+1 to be a truly industry-wide phenomenon. When small- and mid-sized institutions communicate with trade counterparties they do so using phone and fax, which means, of course, that the broker/dealers they communicate with must also use phone and fax-trade inefficiency on both sides of the coin. But for small- and mid-sized institutions, implementing a traditional FIX solution does not make sense. Financially the cost is too high and the time required to implement and monitor such a connection is too intensive.
The same is true for the retail community. While they need to be trading electronically, FIX in its current form is of no help to them for the same reasons mentioned above: price and implementation.
FIXing the Internet
You've heard it evangelized before: the power of the Internet. While the recent dot-com debacle has certainly taught us that consumers do not wish to buy dog food on the 'Net, the ""power of the Internet"" offers a ready-made network on which to build the next generation of electronic trading infrastructure technologies. The Internet is cheaper and requires little to no implementation, which makes it a perfect medium for both small- to mid-sized institutions and the retail community.
While FIX offers these benefits, it was not designed in the spirit of the Internet. Internet trading, by its very definition, mandates a trade connection that is loose, safe and incredibly scalable. While FIX is undoubtedly safe, and can scale to hundreds of trade connections, the Internet-based T+1 environment of the future requires the ability to scale to thousands or even hundreds of thousands of trade connections.
The ideal solution is to marry the power of FIX with the power of the Internet in order to best serve the interests of the small- and mid-sized firms, the big broker/dealers and the growing number of retail investors. A protocol like this can help the retail trader break down traditional barriers in order to access best price and best execution information. By bringing the smaller institutions into the electronic trading fold, a protocol like this (provided it becomes ubiquitous) can position the securities industry to achieve all kinds of technological breakthroughs, not to mention giving the big broker/dealers electronic access to thousands of trade counterparties (and untold liquidity) that were before inaccessible due to the ineffectiveness of manual processing.
An increase in trade volume is coming; a move to T+1 is coming. We need an innovative protocol that will move us forward, not hold us back. FIX will continue to be great for certain trades and certain traders, but a FIX-based Internet protocol can turn every Internet-enabled PC, PalmPilot, and cell phone in the world into a terminal on a global, broadband STP trading network. And such a protocol can empower the securities industry to achieve better trading and create wealth by tapping into every possible liquidity source, giving investors unlimited access via secure electronic trading connections. Greenspan would be proud.
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