Client Centric Fix Infrastructure is Key to Unlocking Business Intelligence

By Mikael Persson, VP Strategic Research
October 26, 2015

Itiviti VP Strategic Research Mikael Persson weighs in on the advantages for investment banks embracing a customer centric approach to unlock business intelligence. Amid rising regulatory costs and mega fines, brokerage firms continue to struggle with how to increase profitability.

While trading in equities has bounced back since the crisis, the revenue per transaction is dropping, and firms don’t have the sure-fire ways to persuade customers to do more business with them. In fact, some execution businesses, especially equities, are viewed as more of a cost center as execution margins shrink and compliance expenses surge. Regulations have forced investment banks to set aside higher capital charges for riskier assets, while staying away from lucrative areas like proprietary trading and leverage-based strategies.  While margin lending has been a source of profits for banks, especially among futures commission merchants, this too is less profitable in a low interest rate environment.

At the same time, investment banks are not as customer-focused as they could be. More customer centricity would enable investment banks to anticipate customer needs and get in front of competitors. Sell side firms are aggressive about getting order flow from buy-side customers, but they are unsure how to differentiate their services. Although investment banks are known for innovations such as financial engineering and automated trading, they are not analyzing information to gain a better understanding of the customer.

Tapping the FIX network for business intelligence

Wall Street is sitting on a mountain of data that keeps flowing through their FIX order routing networks and FIX gateways. This information could be mined for valuable insights into trading patterns, market trends and transaction costs. Through the use of business intelligence, a set of techniques and tools can be applied for the transformation of raw data into useful information for analytical purposes.

Imagine if firms could create a consolidated view of global order flow across all clients and regions. They would have greater visibility into risk for compliance purposes. This could provide a window into what products they are trading, and what orders are coming through per client. Sell- sides could set up alerts so that when volumes are declining, they can be notified to contact the customer. They could also provide insights to their customers based on the trends they’re identifying.

Today, however, firms are not having that conversation with clients. The reality is that they are missing out on a huge opportunity to gain more value from information moving through their FIX ecosystems and to deliver more value to their clients.

Complex FIX infrastructure is a bottleneck

Currently, there are obstacles that are depriving firms of the opportunity to unlock the value behind this order flow data.

For example, sell side firms may be utilizing multiple order management systems, each tied to a separate FIX engine and to a different FIX order routing network.  As the number of trading systems has proliferated inside a firm, the number of FIX order routing networks has grown as well, adding to the complexity and cost. This growth in FIX infrastructure has led to a muddled collection of systems including home-grown and vendor-produced FIX engines, rules engines, routing networks, testing software, monitoring systems, customer onboarding tools, risk management and support. The decentralized nature of the FIX infrastructure has made it difficult for the sell side to see all client activity in one consolidated view.  These multiple third party vendor connections also result in disintermediation between the sell side firm and its clients.

An optimal solution is to decouple the client connectivity layer from the OMSs and order routing technology and replace this with a single connection for each client into a central FIX gateway. This, in turn, makes it easier for the sell side firm to see all trading exposure and manage it pre-trade. Once all the client connectivity is supported on a common FIX infrastructure, then normalized log files from the flow can be directed to a business information system for further analysis.

5 ways to turn raw FIX data into business intelligence

Here are some ways that firms can reap the benefits of business intelligence to make more informed business decisions.

  1. Historical Analysis for TCA. Many firms are saving their FIX message traffic in compliance with certain regulations. Adam Honoré, CEO of Market Tech, LLC, knows of one broker that has performed analytics on top of the stored data. With the cloud reducing the cost of storage, the firm decided to “hone into their transaction cost analysis and effectively back-test all of their order routing,” says Honoré. “The ability to package up your historical FIX traffic allows you to provide better reporting to your clients. It allows you to provide better internal risk controls, and it will cause you to provide more detailed information on order-routing decisions.”
  1. Risk controls. Firms are required under the Market Access rule to monitor their clients’ buying power on a pre-trade basis. But if clients route orders via direct market access (DMA) through multiple FIX engines and networks, the sell side may not see all the activity in real time. With more visibility into how clients trade in aggregate, firms can develop patterns of activity and tune their market risk controls. For example, if clients are routing a bunch of Microsoft orders in the market, then pulling together that data can help the firm understand the market better and understand how clients are reacting to it, says Honoré.
  2. Algorithms. Sell side firms are always looking to improve their algorithms and understand how they are operating under different market conditions. By analyzing client trading activity, they can determine which strategy, (i.e., Liquidity Seeking vs. Percentage of Volume or Implementation Shortfall), has delivered the best execution for a given stock. Then the firm’s sales traders can serve as execution consultants and advice clients on which algorithm is best for a specific stock. This intelligence can help the broker improve its algos, help clients potentially improve returns, and capture market share.
  3. Sales Trading Relationships. Knowing which clients are buying and selling which sectors or market capitalizations—whether small, midcap or large cap stocks—would enable sales traders to organize their sales efforts and enhance the traditional sales-trader function. “It’s intelligence on what is my client trading, what sectors, when do they trade, how do they trade, and how well are they doing on their trades,” says Spencer Mindlin, senior analyst at Aite Group. The sales trader can also ask: “How can we better understand the client’s order flow and how much did they pay us this year?” adds Mindlin. By analyzing these trends, the sales trader can figure out what the firm should be doing to win more of the client’s business. With the use of querying and filtering tools, sales traders are better able to target IOIs to clients that are actionable, says Mindlin.
  4. Tuning Bandwidth & Capacity. Once firms have been saving their machine log files and all of their FIX message traffic, they can start to fine tune their FIX infrastructure, says Honoré. This could lead to better understanding of bandwidth and capacity utilization in the FIX trading infrastructure. “Maybe a FIX path is running a 10 Gig connection that only needs a 1 Gig connection. There’s a cost difference there,” says Honoré.  The value proposition is that storing and analyzing all of that FIX traffic is going to provide information on the total cost of ownership of FIX infrastructure and help firms manage it.

Sell-side firms must become customer-centric

Investment banking is at the crossroads. With profits no longer guaranteed from traditional execution businesses, and compliance costs rising, sell-side firms must search for new sources of revenue. While sell-siders have not been customer-centric in the past, organizations that harness customer data can be proactive and leap ahead of competitors.

Here are a few ways that firms can take action to improve customer centricity:

  • Simplify your FIX infrastructure so that multiple OMSs are connected to a central FIX gateway, so that client trading activity is able to flow through a common FIX infrastructure.
  • Direct the normalized FIX log files to a business intelligence platform for further analysis.
  • Look for patterns in client trading activity and market trends that can help with real-time risk views, fine tuning of algorithms, sales trader performance and measuring capacity and bandwidth utilization within the FIX infrastructure.

To begin this journey, firms need to gain a consolidated view of their FIX data across regions and products.

Related Content

Trading system testing: a practitioner checklist

Trading system testing: a practitioner checklist

FIX Infrastructure End-to-end testing of trading environments is essential for financial services firms today – yet it can seem daunting to implement these complex systems, especially if it involves an overarching overhaul of existing point or legacy solutions. Taking a step-by-step approach can break this down into a more manageable process, while the resulting benefits have the […] December 3, 2018

What NYFIX can do for the buy-side

What NYFIX can do for the buy-side

FIX Infrastructure For the third year running, NYFIX was named “Best low latency network” in the Waters Buy-Side Technology Awards 2018. In this video, Itiviti’s Chief Product Officer, Richard Bentley, talks about the past and future of the NYFIX network for buy-side clients. November 20, 2018

Why post-trade needs FIX

Why post-trade needs FIX

FIX Infrastructure Since the introduction of FIX in the mid-1990s, it has revolutionized the world of trade execution – so much so that 99.5% of the trades performed globally today are being made via FIX. But when it comes to post-trade, the industry has yet to leverage the many benefits that FIX can bring, particularly in terms […] November 8, 2018

The need to take an enterprise approach to testing

The need to take an enterprise approach to testing

FIX Infrastructure It goes without saying that it’s imperative for trading technologists to thoroughly test their systems before the put them in a production environment. Clearly, building a market-beating trading platform requires a high level of uptime and a propensity for failure that’s as close to zero as possible. And for years technologists have used a range […] November 5, 2018

Itiviti Talks

Get our view on global capital markets


Subscription successful

Thank you for subscribing!

Close window

Itiviti Talks

Get our view on global capital markets

Weekly email

    Trends in global capital markets from a technology perspective.

By submitting this form, you acknowledge that data collected by us will be handled in accordance with our Privacy Notice.