Tania Caldow, FIX Product Manager for IRESS, explains how Australian traders use FIXbased platforms to achieve onshore best execution and provide new infrastructure for offshore investors.
For some time now talk of the imminent introduction of alternative trading venues, such as new exchanges and liquidity pools, has been changing the profile of Australian electronic trading at a rapid rate.
The Australian Securities Exchange’s (ASX’s) current role as Australia’s single, centralised market is changing. The beginnings of a new regulatory regime are already in place, with the responsibility of market regulation moving from the ASX to the government run Australian Securities and Investments Commission (ASIC) in August 2010.
Market participants are helping drive this change to see a more open marketplace, in-line with other key global markets, which will bring increased competition along with other benefits such greater liquidity, market innovation and ideally lower overall execution costs. However, fragmenting liquidity across multiple trading venues also brings about complexities that market participants are beginning to address in preparation for these changes.
Whilst the actual details of ASIC’s best execution policy remain unclear, we expect Chi-X Australia to be the first alternative exchange to compete with the ASX. Being part of Chi-X Global, an international firm who has successfully launched the Chi-X platform in Europe, Canada and Asia, Chi-X Australia is readying its trading platform for the Australian market.
This imminent change presents a number of challenges to local brokers. Ideally, exchange connectivity when trading across multiple venues is most efficient if consolidated into a single encapsulated layer. Whilst primarily streamlining best execution, this layer handles the particulars of each exchange and provides consistent, uniform access to all execution venues. Internalisation also becomes important, whereby a broker attempts to maximise opportunities to cross with other in-house flow before routing to a preferred exchange. The current situation, where a broker may have multiple trading applications all accessing the ASX independently, becomes inefficient.
Historically, the adoption of routing orders electronically to the market for many firms has been approached in an ad-hoc fashion. Flows such as algorithmic and systematic trading, direct market access, live market data tools and FIX have been taken up only when required and often implemented independently of each other. The emergence of global exchange connectivity, whether via an Order Management System (OMS) or by a dedicated network, was also thrown into the mix, adding a new layer of complexity. It would be fair to say that the uptake in Australia has been slow and cautious. Firms, especially those at the larger end of the scale, often invested heavily in their own proprietary OMS’s. At the time, it seemed a straightforward decision to make and gave firms a competitive advantage by owning their own proprietary system. But as things started to change, connectivity between systems and exchanges became a difficult issue to address.
This is one area where we have seen strong adoption of the FIX Protocol. Australia’s usage of FIX messaging by firms has not been as widespread as it has been in other Asia Pacific markets. With the recent strong appetite for Australian investments from offshore emerging, however, connectivity between systems using applications like FIX has become a necessity. Whilst within Australia there are only a few types of trading platforms used across the majority of brokers, it becomes a theme of adaptation when enticing flow from offshore. Trying to make offshore clients take Australian only trading platforms is unrealistic. At the same time, global brokers and investment houses also need to provide connectivity to their centralised systems. Therefore, the focus has shifted to providing seamless connectivity and FIX is the ideal solution.
The result is that, more often than not, an Australian broker’s site will contain a complex web of order routing systems and solutions with the use of the FIX Protocol at its heart, ensuring that it is all held together.
FIX is not only used to broadly gather client flow, but it additionally provides connectivity across independent trading applications that access the ASX for trading. When there is only one exchange, it is a reasonably straightforward proposition. By adding new exchanges or even new products at existing exchanges, then everything becomes a little different.
Firms are now increasingly looking towards more sophisticated connectivity platforms, which focus on scalability, redundancy, low latency and high throughput in their design. Vendors are responding to these challenges by developing high performance, centralised infrastructures, which provide efficient and compliant access to all markets. This functionality is typically leveraged from lessons learned overseas where trading across multiple venues is a well established practice. Providing a centralised and consolidated layer to access multiple markets alleviates the need for clients to expensively enhance multiple internal systems in parallel.
Adding weight to the argument of centralising, exchange connectivity draws upon the requirement to achieve best execution. In Australia, we are eagerly awaiting the guidance and consultation paper from the regulator ASIC. Regardless of what the finer details entail, you can be certain that there will be a requirement, to not only achieve best execution, but to also be able to prove it.
Smart order routing technologies to access the market are likely to gain considerable importance in the near to mid term. But the use of smart order routing technologies in Australia is already gathering momentum. The ASX has already fragmented its own market by introducing a sideline product called Centrepoint, which is a dark pool where trades are executed at the mid price of the underlying security trading on the central orderbook. Smart order routing technology can provide seamless access to this new market along with any others. In general, they provide a solution that allows clients to mitigate the negative impact of liquidity fragmentation, while benefiting from increased competition among execution venues. It goes without saying that implementing a managed, smart order routing strategy is essential for brokers seeking best execution across an increasingly fragmented marketplace. Centralising the smart order routing solution, whilst opening it up for access via FIX, seems to be the approach taken by clients both onshore and off. It’s a solution that seems to offer the most flexibility without unnecessary complication, but importantly, it removes elements of replication, which are typically both costly in terms of time and money to manage.
As local firms transition to a multiple trading venue environment in Australia, they continue to bolster their connectivity options for order flow, both in and out of the country. One thing is for sure, the use of FIX messaging for connectivity and order routing will only play an even more important role in the future.