The FIX Protocol as an Effective Solution for Algorithmic Trading

Kevin Houstoun,

Co-chair FPL Global Technical Committee,

Consultant to HSBC

Algorithmic Trading: The Introduction

What is Algorithmic Trading?

Algorithmic Trading is the automated execution of large orders using strategies which aim to minimise market

impact

The Origins Algorithms were originally used, and are still used today, by their developers

to deliver alpha. In the late 1990’s there also started to be seen as productivity tools Two major market shifts encouraged its emergence:

The SEC’s “Reg ATS” in 1996, which created electronic crossing networks and generated greater fragmentation of liquidity

The decimalisation rules of 2001, which aimed to promote price competition in smaller increments and reduced bid-ask spreads

Both of these developments led to a need to trade in smaller amounts to minimise market impact and created the need for an effective trading approach to meet these goals

This trend is now a global phenomenon, with recent estimates suggesting that more than 40% of trades input into the London Stock Exchange electronic order book are now generated by algorithmic trading engines

Current Trends Productivity algorithms are now an established phenomenon.

Algorithmic trading strategies are becoming more sophisticated and exotic with the ability to include a greater number of parametres

Algorithmic trading is no longer just an Equities phenomenon, strategies are now emerging within the Foreign Exchange and Derivatives market

Changes in market structure as we are seeing here in Europe with the implementation of MiFID generating the need and opportunity to access an ever increasing number of execution venues

The rise of the buy-side as a more influential partner. The buy-side are demanding increased control over their trading strategies

,

FIX Algorithmic Trading Definition Language SM

 

Current Algorithmic Strategy Distribution Chain

BuildBroker builds / back-tests the algorithmic strategy and rolls-out it to internal traders

DistributeVendor develops and certifies algorithmic strategy and rolls it out to the buy-side client

IntegrateBroker creates FIX specification for external access and distributes it to OMS vendors

ReleaseBroker documents any OMS specific nuances and trains client on using the algorithmic strategy

What are the Core Problems? Build

Clients are demanding more customization FIX tag proliferation. Every broker is defining their own custom FIX fields

increasing the complexity of vendor integration Integrate

Every algorithm needs to integrate/test/certify with every OMS provider OMS vendors have limited resources and integration can take up to six

months Distribute

Buy-Side clients often need to upgrade to latest version of OMS to access new algorithms

Release OMS vendors typically enforce a one-size-fits-all approach Formatting and validation of strategy parameters can be problematic

FPL Algorithmic Working Group

Overview The FIX Protocol Limited (FPL) Algorithmic Trading Working Group is part

of the FPL Global Technical Committee. The Working Group is comprised of volunteer representatives from the

financial community including sell-side, buy-side and financial technology providers

Goal Evaluate and recommend solutions for the current algorithmic trading

integration issues Use XML to define algorithms and their parameters via an FPL

provided standard XML Schema Evaluate solutions for XML based display technology to richly display

each algorithm and its parameters in any user interface

The Proposal: Use XML to define an algorithm

Broker FIX Specification

Algorithm

FPL Provided Schema

+

Broker creates an XML file which describes its algorithms, their parameters, FIX tag mappings and how the algorithms should

be rendered in any 3rd party application

OMS vendors parse these XML files & render them in their application eliminating the need

for custom programming

Strategy Parameter &Interface XML File

The Technical Solution

Schema divided into 3 sections

1) Parameters (Core) Schema• Describes each of the algorithms parameters

2) Validation Schema• Provides a language from which rules can be authored.• Rules can be applied to parameters.

3) GUI Schema• Describes how parameters should be rendered within the UI.• Provides layout information.

The FIX Algorithmic Trading Definition Language SM Sell-side Advantages:

FIXatdlSM enables algorithms to be unambiguously represented using XML files

FIXatdlSM files can be automatically read as configuration files into buy-side OMS systems, significantly reducing the time to market for new algorithmic trading strategies

With additional reductions in terms of the testing and coding time required, FIXatdlSM generates potential savings in terms of the financial and technical investment required to innovate new algorithmic order types

Buy-side Advantages: As the Sell-side achieve shortened time to market, the buy-side benefit

from access to the latest algorithmic trading strategies faster

The FIX Algorithmic Trading Definition Language SM

OMS and EMS Provider Advantages: All algorithmic strategy definitions may be received in a standardised

format

Once providers have built the initial framework a minimal amount of custom development is required for each new release of a Sell-side algorithm

Cost savings are generated from reduced resource requirements, as less time is spent performing analysis and development

Current Status The free and open FIXatdlSM is currently in its final stage of beta testing

This testing is being conducted and supported by some of the worlds largest broker dealers

This new standard will be officially launched in Quarter 1, 2008!

Would you like to find out more about FIXatdlSM?

Visit www.fixprotocol.org/working_groups/algowg