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 Build Broker builds / back-tests the algorithmic strategy and rolls-out it to internal traders Distribute Vendor develops and certifies algorithmic strategy and rolls it out to the buy-side client Integrate Broker creates FIX specification for external access and distributes it to OMS vendors Release Broker 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: FIXatdl SM enables algorithms to be unambiguously represented using XML files FIXatdl SM 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, FIXatdl SM 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 FIXatdl SM 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!

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