Post-Trade Matching: No Quick FIX

After offering a new alternative to fund managers and broker dealers to match the economic details of securities transactions, FIX Trading Community is finding that the industry pickup is slow.

Although early adopters report that it’s just as good as central matching — and better in some ways — no one expects a mass migration away from the practice of central matching done through Omgeo’s Central Trade Manager (CTM), acknowledge attendees and panelists at the FIX Trading Community’s seminar in New York on Thursday afternoon.

Members of the FIX Trading Community and technology providers might rave about the merits of extending the use of FIX messages from trade execution to the post-trade space, but numbers really tell the tale. Only a handful of fund managers are now using the FIX protocol for local matching — the allocation, confirmation and affirmation of trade details. For the most part those are the same buy-side firms which initially espoused the use of the FIX message protocol for post-trade matching in 2013 when the new message types and workflow process was first established by the FIX Trading Community’s post-trade working group.

To date, the highest percentage of message traffic is allocations for equity transactions, which is the only asset class currently supported to any great extent by the FIX protocol messaging. However matching capabilities for additional asset classes are either starting or under development, so interest is expected to climb among potential users.

One key reason for FIX’s lackluster progress in the post-trade space: fund managers still need to accommodate broker-dealers using Omgeo’s CTM.  Yet another reason: no one has any gripes on the CTM’s operational efficiency and with other development priorities, adapting to the FIX protocol is understandably on the back-burner, says the operations manager at a large fund management shop who declines to be identified.

Alternatives to in-house development exist as evidenced by Alpha Omega, a post-trade technology specialist, which has teamed up with order management system providers to integrate their front-ends with its FIXaffirm engine for local matching.”Fund managers can use both the FIX message protocol and the CTM, because they can co-exist in their shops,” explains Ignatius John, president of the San Francisco-headquartered firm.

Local matching relies on a sequential windshield wiper confirmation-affirmation process whereby fund managers and broker-dealers send messages back and forth to confirm trade details and reconcile any discrepancies. Not so with central matching, which requires them to simultaneously load their understanding of the economics of a trade into a third-party system, which immediately flags discrepancies needing correction. That’s how Omgeo’s CTM works.

Omgeo isn’t the only rival to the FIX message protocol when it comes to post-trade matching. SWIFT has also come up with message formats to use over its network, but so far traffic in the US has been scant, say attendees at the FIX Trading Community event hosted by Thomson Reuters. SWIFT’s offering, coined GETC, has reportedly been far more successful in Europe, reflecting the network provider’s historic regional strength. Hence, it appears that for now, relying on either Omgeo’s CTM or the FIX message protocol is the option in the US market.

As the world’s largest post-trade communications service provider, Omgeo has consistently asserted that using its CTM will help ensure a same-day affirmation rate, considered essential to meet the two-day settlement cycle (T+2) which has been widely adopted in Europe and is under consideration in the US.  Although the sequential approach of local trade matching sounds like it may be less efficient time-wise, users of local matching attending the FIX Trading Community event insist that they can still either match the trade or highlight discrepancies between counterparties in a matter of seconds. Latency simply isn’t an issue.

Given that the CTM’s initial penetration into the fund management and broker-dealer communities wasn’t achieved entirely voluntarily, Omgeo fell victim to ongoing criticism. All users of the legacy Oasys confirmation system were forced to switch over to the CTM as of June 2013 or be cut off. Granted, Omgeo subsequently won plenty of new clients, yet the mandatory migration did little to assuage some feeling that the pricetag for using the CTM was far too high. Hence, the market exists for alternatives such as the FIX messaging protocol for local matching.

It stands to reason that expanding the use of FIX as a popular trade execution message protocol to the back-office shouldn’t be that hard to do with little operational fanfare and plenty of financial benefit. Some fund managers attending the FIX Trading Community event even pointed to the added benefit of more granular details of the trade beyond the economics encompassed in the FIX post-trade message protocols.

“Fund managers are now proactively contacting us to ask us for help with using the FIX protocol for local matching,” says John. “They are taking some of their traffic away from the CTM.” Such a scenario could translate into savings of at least 25 percent off of the total ticket costs for those transactions by his estimates.

The operations manager at the fund management shop now using FIX protocol for post-trade matching, who spoke with FinOps on condition of anonymity,wouldn’t provide specific figures, but confirmed that his firm is saving “plenty” by moving as much as 90 percent of its equities message traffic off of the CTM and into the FIX protocol. Those savings will ultimately be passed onto end clients and could result in a higher return — and higher performance fees — for the fund management shop. A win-win, he says.

Just how did he manage such a hefty migration plan?. By lobbying broker-dealers to accept messages in the FIX protocol instead of only through the CTM. It wasn’t easy, he said, but given the relatively large traffic of the buy-side firm, broker-dealers ultimately acquiesced. It was then only a matter of a few months before his firm moved the bulk of their equities transactions to local matching.

Paul McSherry, director of middle office operations for US agency brokerage Liquidnet, observes that change comes harder for  large banks and broker-dealers operating on multiple legacy systems. His firm was lucky. Because it operates on just a single middle-office platform, all it took was one developer working for three months to build out and test the capability for using FIX post-trade messages.”It depends on just how willing a firm is to adapt. Having multiple sources of allocation and confirmation delivery helps diversify some of the risk for us as a service provider to asset managers,” explains McSherry.

Despite the slow adoption of the FIX message protocol in the post-trade arena, he is optimistic on its prospects.”There is an evolution going on and it will take time to adapt more asset classes into FIX,” says McSherry. “In the meantime, it is likely that fund managers will start using the FIX protocol for part of their post-trade matching traffic.” That stance was confirmed by two other operations managers at fund management shops attending the FIX Trading Community event, while declining to elaborate.

Once more broker-dealers start espousing the FIX protocol for post-trade matching, McSherry adds, it is likely they will also become afficionados and start promoting its use to other fund managers. “We’ll see a domino-effect,” agrees the fund management operations director.

What does Omgeo have to say? It has consistently argued against making an apples-to-apples price comparison between using the CTM and the FIX message types. The firm, owned by the US Depository Trust & Clearing Corp., wouldn’t respond specifically on any comments made during the FIX Trading Community event, but a statement sent to FinOps suggests that its current market dominance is the answer to all questions.

“The total equity and fixed income volumes processed by Omgeo CTM increased by 24 percent during 2014 and there are more than 1,700 clients globally using the central matching service today. We remain committed to helping financial institutions worldwide to improve post-trade processing efficiency through continuous innovation and working closely with all industry participants,” says the statement.