Virtually all major broker-dealer/sell-side market participants recently announced support for a new initiative around algorithmic trading. Surprisingly enough, the initiative did not involve some new algorithmic trading strategy with a catchy name, the emergence of yet another dark pool or another consortium looking to solve the latest challenge. What could it be you ask? The answer is FIXatdlsm - FIX Algorithmic Trading Definition Language - an emerging standard developed for the benefit of buy- and sell-side firms. And, if you haven't stopped reading at the word 'standard', this new language will deliver advanced support for algorithmic trading, enabling buy-side firms, including institutional and hedge funds, to access new order types within a significantly reduced timeframe.
The distribution challenge
The boom in algorithmic trading began in the U.S. equities market
in 2000, partly in response to changes in market structure. When
the minimum tick size changed from 1/16ths to pennies, it caused
a reduction in the spread between bids and offers and forced
people to trade in smaller increments. Ideally, to efficiently
trade in smaller increments you need to use a computer, hence the
expansion of algorithmic trading.
Having a large number of buy-side firms already using the FIX Protocol, the U.S. equities market quickly embraced algorithmic trading as brokers started offering direct access to their algorithmic execution platforms. A key challenge for this direct access was integrating these new execution tools with the client's order management system (OMS). Actually, many buy-side traders had their first experience of algorithmic trading on another trading platform away from their primary order management system.
In most cases, the broker-dealers providing algorithmic trading strategies did not own the distribution channel. An analogy is a new consumer product which needs shelf space next to similar competing products. Shelf space is a valuable commodity, whether that's a supermarket shelf or a buy-side OMS. Most of the OMSs or EMSs (execution management systems) were owned by third-party vendors which meant the broker and vendor had to agree on implementation specifications, along with the not insubstantial contractual/revenue details.
To get around the distribution challenge, many broker-dealers initially purchased a channel in the form of an EMS and eventually a few brokers added OMSs as well. Owning a distribution channel helped as it meant that the brokers' priorities were always at the top of the development queue. However, buy-side clients use a variety of OMS and EMS solutions, so many sell-side firms still had to create vendor management programmes to handle the variety of business and technical details of distributing algorithmic execution tools.
"… the current method of integration is a very time-intensive process requiring specific development, testing and certification efforts."
In today's marketplace, buy-side firms are increasingly
leveraging the use of algorithmic trading strategies to decrease
transaction costs and increase investment return. As a result of
this interest, sell-side firms are now competing for the client's
attention based on the performance of their algorithmic trading
strategies. The current model is for sell-side algorithmic
providers to develop a specifications document that reflects the
interface requirements of their algorithmic strategies. This
requires the OMS or EMS vendors to modify the order entry ticket
on their front-end as well as their FIX order-routing gateway to
support any FIX tags related to the algorithmic trading
The specifications document basically describes how to use a firm's algorithms via the FIX Protocol. It typically describes the strategies, user-defined (i.e. non-standard) FIX message fields and user interface requirements. Unfortunately, every time sell-side providers want to add new strategies (or refine existing strategies) they need to invent new message fields, update their specifications document and wait for the clients/vendors to code it up and release new versions of the user interfaces.
Overall, the current method of integration is a very time-intensive process requiring specific development, testing and certification efforts. From a client/vendor perspective, this issue is multiplied and complicated by the number of brokers they have integrated. Since OMS vendors typically do not release new functionality to all of their clients at the same time, algorithmic providers need to potentially manage multiple versions of their FIX specification document against what the various vendors/clients have developed and certified.
A common language for algorithms
Within FIX Protocol Limited (FPL), we formulated an Algorithmic
Trading Working Group comprised of sell-side and buy-side firms
and financial technology vendors to solve these algorithmic
trading integration issues. The group originally proposed
algorithmic trading extensions to FIX messages to support the
addition of unlimited algorithmic parameters in a standardised
manner. This ultimately resulted in some enhancements to the
latest version of the FIX protocol (version 5.0).
However, this approach only solved one part of the problem. The biggest challenge continued to be how the vendors and buy-side would represent these new features across all OMS/EMS front-ends quickly and cost-effectively. The working group has been focused on the evaluation and recommendation of solutions addressing the current algorithmic trading user interface issues.
The proposed FPL solution - FIXatdlsm - will shorten the time-to-market by lessening the integration development work required by the OMS vendor or client. Ultimately, real-time 'on the fly' integration of new/modified algorithms could eventually be possible. At its simplest, FIXatdlsm leverages XML, the general purpose markup language, to define algorithms. XML allows you to create your own vocabularies, therefore offering the adopter flexibility.
The working group has established a set of rules for creating XML files which represent algorithmic trading strategies. These rules are contained in the FIXatdlsm Schema, an industry-agreed standard maintained by FPL. Using the FIXatdlsm Schema, brokers can create an XML file which describes their algorithms, parameters, FIX field mappings and how the algorithms might be rendered (displayed) in a user interface.
This form of standardisation makes it simple for vendors and the buy-side to work with all the various algorithmic strategy offerings marketed by the sell-side firms. In lieu of custom development, OMS vendors will be able to simply consume these XML files (similar to configuration files) to update a broker's algorithmic offering, eliminating the need for custom programming.
Built for speed
The benefits of FIXatdlsm extend to all segments of the
algorithmic trading marketplace. The value proposition for the
sell-side is that their algorithms can be unambiguously
represented in XML files. These same files can be automatically
read as configuration files into buy-side OMS systems thereby
shortening the time to market for new algorithmic trading
strategies. In addition, development and testing time for
validation can be greatly reduced. The industry has moved beyond
very simple algorithms with limited utility to strategies which
include a vast number of parameters to satisfy a variety of
situations. These strategies are typically described in a FIX
specification document that requires detailed analysis by the
vendor which in some cases entails a lot of discussion back and
forth between the vendor and the algorithmic provider. While the
industry has shortened the overall analysis and deployment of new
broker algorithmic strategies, there is still considerable effort
The benefit for the OMS/EMS vendors will most likely come in two phases. In phase one, brokers will submit the definitions of their algorithmic strategies to the OMS/EMS vendors via a FIXatdlsm-formatted XML file in conjunction with their FIX specifications. The immediate benefit is that the vendors will receive all of their brokers' algorithmic trading strategy definitions in standardised way, ideally eliminating the back and forth resulting from ambiguous FIX specification documents. Phase two will occur once the vendors build a framework to exploit the contents of these files to minimise the amount of custom development required for each new release of the broker algorithms. The major benefit will be the cost savings resulting from less time spent performing analysis and development.
"The industry has moved beyond very simple algorithms with limited utility to strategies which include a vast number of parameters to satisfy a variety of situations."
OMS/EMS systems will be able to read FIXatdlsm files and render
new order entry screens using common 'look and feel' elements and
layouts. These screens could also include helpful pop-ups and
each order entry field may have comprehensive validation
requirements formally expressed. Order entry fields can also
specify how the algorithmic parameters types will be formally
expressed using the FIX protocol.
The major benefit for the buy-side results from the shortened time to market for the latest and greatest sell-side algorithmic trading strategies rendered in the appropriate 'look and feel'. In time, brokers might eventually develop authoring tools which could allow their coverage teams to dynamically create customised algorithmic trading strategies for which FIXatdlsm files are emailed and loaded into the client's order management system. There are many details to work out, but certainly it is a possibility.
Many major, sell-side participants in the algorithmic trading
marketplace, including the six largest broker-dealers, have
demonstrated commitment to FIXatdlsm by submitting XML files of
their algorithmic order types. These files are available for
immediate downloading and testing on the FIX Protocol website
The working group has opened up the Beta testing phase, as it prepares to finalise the standard and submit it for final approval. To date, the testing has not identified the need for any significant changes to the standard and the final release date is currently planned for Q1, 2008.
It is clear that support for FIXatdlsm from the algorithmic trading community has been very strong. However, we realise that OMS and EMS vendors, with large established code bases and varying amounts of in-house XML skills, will need some time to learn and adopt the standard. The working group is particularly concerned that the standard be adequately tested before version 1.0 is released. However, the group also understands that the biggest challenge will be how vendors/clients will represent these new features on their front-ends. During the Beta testing period the working group will be very responsive to any factors that might limit adoption and considerable resources are available to ease the implementation of FIXatdlsm.