achieving stp in canada - the fix connection stp in canada.pdfwhile canada lags somewhat in adapting...

41FIXGlobal

According to a study commissioned by the Canadian

Capital Markets Association, Canada lags the U.S. by 14

months in moving towards matching trades on trade

date. In as much as U.S. and Canadian securities

markets are inexorably linked, Canada is focusing on

quickly accelerating the institutional trade matching

process to ensure it is able to equal its southern

neighbour's progress.

In addition to lagging on the trade matching front,

Canada has also been slower in adopting electronic trading

and standards such as FIX. This is primarily due to the

concentrated nature of the Canadian financial markets.

There are fewer domestic trading venues that need to be

accessed in search of liquidity. Canada is however ahead in

terms of payments and dematerialization. The Canadian

Payments Association (CPA) Large Value Transfer System

provides a single national clearing and settlement system

for security industry cash settlements. It is a key element in

establishing Canadian leadership in payment efficiency.

The current priority in Canada is to focus on the

institutional marketplace, promoting efficient and timely

trade matching among capital market participants. This

involves achievement of trade date matching of institutional

trades from initiation through to confirmation/affirmation

and eventually to include settlement.

The current plan is to achieve the institutional trade

matching goal by July 2007 with the following milestones:

By Stephen Pesner, Stratix Consulting (left) and

Robert Smythe, eClientscope Inc.

The current Canadian situation: In a recent review of

straight through processing (STP) in Canada by Stratix

Consulting, it was concluded that further work is required

in Canada to keep pace with global trading markets.

Achieving STP in Canada -The FIX Connection

42

AMERICAS

Timeline T T+1

Jan 05 - 100% reported to

July 06 Depository by end

of day

Jan 05 - 75% confirmed /

July 06 matched by end

of day

July 06 - 100% reported to 95% confirmed /

Dec 06 Depository by matched by noon

end of day

Dec 06 - 100% confirmed / Depository end

July 07 matched by end of day is 7:30 p.m.

of day

The use of straight through processing will facilitate

meeting these goals; where STP is defined as seamlessly

passing financial information electronically - on a timely,

accurate, system-to-system basis - to all parties in the end-

to-end securities transaction chain, without manual handling

or redundant processing.

Candian LeadershipWhile Canada lags somewhat in adapting FIX on both

the buy and sell sides, its exchanges have shown leadership

in electronic trading.

In 1977 the TSX introduced the world's first Computer

Assisted Trading System (CATS) and in 1997 the TSX closed

its floor and became an entirely electronic exchange. Direct

Market Access (DMA) has been available in Canada since

the mid-90s. The TSX uses Securities Trading Access

Message Protocol (STAMP) but has not provided FIX

connectivity to date.

The Montreal Exchange is also fully electronic with FIX

connectivity and has a fully integrated clearing and

settlement process via its subsidiary, the Canadian

Derivatives Clearing Corporation.

The Canadian Securities for Depository (CDS) is

Canada's national securities depository, clearing and

settlement hub supporting Canada's equity, fixed income

and money markets. It holds over $2.3 trillion on deposit

and handling over 62 million securities trades annually.

Virtually all of these securities are in electronic format. CDS

also provides an international gateway settling over 14

million cross-border transactions with the U.S. annually and

through custodial relationships with the Depository Trust

Company, Japan Securities Settlement & Custody Inc., and

Euroclear France. CDS provides automated trade matching

for exchange, non-exchange trades and has the capability

of handling VMU matched trades.

Mutual fund order processing in Canada is efficiently

handled by FundSERV via the secure transfer of accurate

information and the ability to place, reconcile and net settle

mutual fund orders using advanced online workflow services

based on XML standards.

The trading desk and FIX connectivityThere is still much to be done at the trading desk to

automate the order and confirmation processes. Today

much of the communication between parties is via phone,

FAX and email. Direct machine to machine electronic links

between trading systems are not in place for the majority of

trades.

In a presentation at the FPL Canadian Electronic Trading

Conference in June 2005 Sean MacKenzie, Managing

Director and Head of Equity Execution Services at RBC

Capital Markets, stated that proprietary desktop trading

applications such as E*Trade, Belzberg, ITG, Reuters, etc.

still dominate the trading desks. He also identified that

when FIX is used FIX 4.0 is the most prevalent version with

usage focused on IOIs and single trade messages.

He mentioned that more buy-side firms have

implemented OMS in the last 18 months than in the

previous 5 years. These have been mainly broker neutral

PLease make headings avenir 85 heavy - 9pt

body text of charts 8.5pt avenir 55 roman

FIX connectivity providers in Canada

MFN8%

NYFIX3%

E*TRADE24%

Chart by Sean MacKenzie, Director and Head of Equity Execution ServicesRBC Capital Markets

Bloomberg40%

Belzberg6%

Other5%TNS

8%ATR6%

43FIXGlobal

OMS solutions from vendors like Advent, Bloomberg,

Charles River, FMC, Linedata, Macgregor and LatentZero,

all of which have built-in FIX connectivity.

His presentation showed that there are many network

providers in Canada providing FIX connectivity. So it is not

for lack of tools that FIX and STP have not progressed as

rapidly in the Canadian securities market as they have in

other countries.

With use of these enablers increasing, it is expected that

FIX adaptation will grow rapidly in Canada.

STP is not deadWhile all may seem quiet in the STP world, much is

going on behind the scenes particularly within individual

firms. An analysis by Stratix Consulting of key STP

components identified the number of pieces in the puzzle

that must match in order to have end to end integration.

Implementing electronic interfaces between each

component is a significant task. Having all the links work

harmoniously together to complete the puzzle requires

significant industry cooperation. The use of standards such

as FIX and ISO 15022 to provide the required interfaces is

growing in Canada and should make the overall integration

task easier.

We all speak different languagesCanada has two official languages but in the securities

industry participants use a myriad of formats and

mechanisms to communicate. Lack of standardization is

driven by some extent from competitive pressures. For

example, brokers must compete for money manager

business, and this requires them to accept any form of

communication from them. It also stems from a lack of

technology implementation, e.g. securities lending is still

heavily FAX based. Unfortunately, the many different ways

now used to communicate have created a jumble of

operational issues. The only way to streamline processes is

to reduce the number of communication methods, while

adopting a common technology infrastructure. All

participants will need to quickly change or be left behind.

FIX helps by providing a common language.

The importance of messaging standardsImagine the challenges faced by countries with different

languages, customs and communication methods trying to

work together to achieve a common objective. This is not

unlike the challenges faced by participants within the

securities industry in executing and settling trades. While

FIX has taken a dominant position in trade automation, the

ISO 15022 standard is the most prevalent standard for post

trade confirmation and settlement.

Security trading in Canada is similar to other securities

markets, requiring the interaction of many parties,

processes and systems. A simplified view of connections

between participants identifies the multiple types of

interactions between them. A variety of competing and

conflicting communication methods and terminology are

currently used to effect these interactions and this impedes

progress toward shorter trade-settlement cycles. The

PLease make headings avenir 85 heavy - 9pt

body text of charts 8.5pt avenir 55 roman

Key STP Enable Elements

Legal and Regulatory

Standards FIX

ISO 15022

Securities Lending

Referance Data

Dematerialization

Central Trade

Matching

Best Practices Payments

IP Communications

Local Trade

Matching

Matchingon

Trade Date

Copyright Stratix Consulting 2005©

We don’t all speak the same language

Payments

?

?

?

?

?

?

?

?


44

AMERICAS

following examples reflect the types of problems the

industry currently faces:

≠• Over the last 30 years, the Securities Industry has

adopted many conflicting security ID numbers,

which range from CUSIP, ISN, Sedol and Stock

Ticker Symbol acronyms to proprietary ID numbers

for money market and mutual funds.

• Security trades can be expressed and delivered in

various forms, from highly structured messages

using STAMP (TSX Securities Trading Access

Message Protocol), FIX or SWIFT protocols; to

freeform messages contained in fax, email and

phone communications.

• The terminology and definitions used to express

precisely the same data and business-processing

concepts can vary widely from firm to firm, and

from country to country.

• Networks and other communication media used

for moving trade and related data messages can

vary from telephone and fax to email or proprietary

networks, all providing data transportation with

varying degrees of cost, security and infrastructure

requirements.

STP-related functionsTo drill more deeply into the problem it is helpful to

identify the four core Security Industry business functions

that are of interest from an STP perspective. Each of these

functions involves a subset of key industry participants and

interactions, as shown below.

1. Trading - buyers, sellers and intermediaries

interconnect to convert a trade order into an

executed trade, ready for settlement.

2. Investment Management - Investor portfolio

management and trade decision making to create

a trade order

Copyright Stratix Consulting 2005

Bank Excgabges Broker

VMU

MoneyManager

Cdn PaymentsAssoc

Custodian

Bank

Fund SERV

MutualFund Cos

MutualFund Dist

InstitutionalInvestor

Depository

TransferAgent/Issuer

Cdn PaymentsAssoc

©

45FIXGlobal

3. Mutual Fund Manufacturing, Recordkeeping and

Distribution - fund creation, marketing, distribution

and unit holder recordkeeping of mutual and

pooled funds for institutional and retail sales.

4. Trade Settlement and Custody - settlement,

allocation and portfolio recordkeeping for buyers,

sellers; security issuers; depositories

The buy and sell-sides of tradingThe terms “Buy Side” and “Sell Side” are commonly

used to distinguish between the types of participants

involved in institutional trading. The Buy side tends to be

money managers and mutual fund companies - those

looking to place new incoming funds or rebalance existing

portfolios, the Sell side tends to be brokers and dealers -

those looking to fill trade orders submitted by the buy side.

Each side has its own set of core business processes that

must interact to convert a trade order into an executed

trade that is ready for settlement. Most of the interactions

are in the form of messages communicated from a process

on one side to a corresponding receiving process on the

other, and in most cases occur on a continual basis

throughout the day.

As Canadian investment manager interest in markets

beyond Canada grows, due to recent changes in

regulations that now allow Canadian pension plans to hold

up to 100% foreign content (previously limited to 30%), the

increasing need to trade in these venues may require

interfaces directly with principals in these markets.

All of this involves a mix of message formats and media.

Some business processes may be electronically connected

while others may still be manually linked via phone calls or

fax. The reality is that each side can only communicate to

the level of technology and message sophistication

available on the other side, forcing communication to the

lowest common denominator of technology and message

standard. Any given Buyer and Seller will typically be linked

to numerous counterparties, driving them to use a multitude

of communication methods, e.g. price discovery via phone


Broker

Broker

Broker

MoneyManager

MoneyManager

MutualFund CosBroker

Investor

CustodianTransferAgent/Issuer

Investor Bank

CRA

CSA

MFDealers

CPA

VMU

Exchanges

Depository

DTCC

FundSERV

CPA

Street - Sell Side Institutional - Buy Side

©

46

AMERICAS

or FIX and order allocation via Email, Excel spreadsheets,

FMCNet or Omgeo, or all of them at once!

Standardization and FIXAn underlying premise of electronic trading is that

communication between buy and sell sides can be

significantly improved through the use of structured

electronic messages specifically designed for securities

trading business processes and their data requirements.

Such messages would correspond to each relevant Buy

and Sell-side business process, and would be designed

with consideration of other trading participants that

support and perform trade execution and settlements,

such as exchanges, depositories, reference data vendors,

clients, VMUs and custodians. To achieve STP, such

electronic messages would go directly from one

participant's business process application to another

participant's application, machine to machine, without

any re-handling of data, its attendant delays and

introduction of errors. The message sources and

destinations would electronically “speak” to each other in

the same language.

This is where FIX comes into play. The FIX Protocol

defines and organizes data associated with specific trading

business processes into predefined message formats.

Where both the source and destination (Buy and Sell side)

adopt FIX for a specific business process, integration can be

“seamless” between them. Currently in FIX version 4.4

there are approximately 80 FIX business messages covering

over 900 fields that can be used between buyers, sellers

and supporting participants.

Broker - DealerBusiness Processes

Money ManagerBusiness Processes

Sell Side Buy Side

• Price Discovery• Trade Order Strategies• Order Flow and Routing• Trade Execution• Trade Order Admin• Order Allocation & Matching• Security Positions & P & L

• Portfolio Performance• Investment Strategies• Trade Order Strategies• Investment interest broadcasting• Trade Order requests• Fill Details• Order Allocation and Matching• Portolio recordkeeping

Business Process Messages between the Buy and Sell Sides



Custodian

TradeCounter -

Party

Exchanges

ReferenceData

Vendors

Client

Central/localVMU

DepositoryCentral/

localVMU

Central/localVMU

Depository

ReferenceData

Vendors

Broker - DealerBusiness Processes

Money ManagerBusiness Processes

MatchedTrades

MatchedTrades

Blocksfor Sale

Trade OrderRequest

IOI

NOE

Allocations

Match error &amends

Trade Fills

FIX WorkflowFunction Messages

©

47FIXGlobal

Moving towards standards-based electronicinteraction

In order to accelerate the trading process and move

towards matching on T, common electronic-based messaging

standards like FIX and ISO 15022 will have to be implemented

across all industry participants. While progress in achieving

end-to-end solutions throughout the industry has been slow,

the tremendous interest at the FPL Canadian Electronic

Trading Conference 2005 this June, with over 350 attendees,

indicates that momentum is growing. The increase in the use

of trade order management systems, the growth of hedge

funds and algorithmic trading and the need to reduce risk and

demonstrate best execution for both domestic and foreign

trades will stimulate interest in STP and standards like FIX.

As portfolio performance becomes harder to achieve,

interest in utilizing the most effective trading approaches and

most efficient back office processes will grow. This challenge

is compounded by the growing amount of information that

must be received, filtered and acted upon often with lighting

speed. Managing this information can no longer be done

effectively using manual processes. As the securities industry

automates trading and settlement processes from end to end

it is becoming clear that this cannot be totally accomplished

without automating the handling of market, reference and

entitlements data. The data standards are still evolving so this

adds to the challenge. Regardless, anyone undertaking an

STP initiative without a data management component will not

be fully successful.

In Canada institutions such as the TSX and CDS who are

already major sources of market data, corporate actions and

entitlement information are looking at further opportunities

to effectively package and distribute it to meet industry

needs. CDS today sells feeds from SEDAR (SEDAR is similar

to EDGAR in the U.S.) and SEDI (System for Electronic

Disclosure by Insiders) that CDS operates on behalf of the

Canadian Securities Administrators. This is different from

the U.S. as the regulators in Canada have allowed CDS to

commercialize the data to help defray the cost of operating

these systems. In addition many vendors, who sell,

distribute, reformat and verify information used as part of

the trading and settlement process are making their

capabilities known to the securities industry.

Achieving end-to-end electronic process will no longer

be of interest only to information technology and

operations staff, but will see portfolio managers and traders

demanding it. They are realizing that their future success will

require seamless electronic process so they can focus on

investment and trading strategies and not on the associated

processes. At the FPL Electronic Trading Conference 2005

in New York City at the beginning of November, investment

managers provided examples where after implementing

STP processes portfolio managers were able to manage

40% more assets and increase trading capabilities by 300%.

Revenue increases of 30% and expense decreases of 6%

were achieved. The net result was that profits doubled.

Achievements like this provide a major competitive

advantage.

In Canada most of the STP focus has been on enhancing

back office processes. While this is important it is becoming

clear that to keep up with the efficiency and profitability

gains that are being achieved south of the border, more

focus on automating front office processes is essential.

The FPL Canadian Electronic Trading Conference 2006

that is planned for May 2006 in Toronto will contribute to

enhancing the efficiency and performance capabilities of

Canadian securities market participants. The Conference

will focus on achievements by industry leaders and future

opportunities for Canadian security industry participants

with respect to performance, risk, compliance, electronic

trading, data management and enabling solutions.

Our reading of the mood in Canada is that the capital

markets participants are determined to keep Canada at the

forefront of electronic trading and straight through

processing. FIX

Any thoughts on this or other articles? Please send any comments, refering to this article as Vol 1 Issue 8 AM4, direct to Edward at [email protected]

achieving stp in canada - the fix connection stp in canada.pdfwhile canada lags somewhat in adapting...

Documents