Why pay for a FIX Engine?
Over the last couple of decades, the FIX protocol has become pervasive in capital markets, providing the interoperability that enables much of today’s global institutional electronic trading.
In one form or another, FIX Engine technology sits at the heart of just about every investment bank and investment manager’s trading infrastructure.
With a number of small low-cost providers available, and open-source libraries even accessible for ‘free’, market participants can be left wondering whether FIX Engines have become commoditised. How much should they be paying for such technology, or should they be paying at all?
Given industry cost pressures and shrinking margins across many asset classes, this is perhaps an understandable question. But looking at the business-critical role of FIX technology in supporting a firm’s sales and trading business, it seems an odd place to take short-cuts.
At Rapid Addition our mission is to build the highest performing, most robust electronic trading infrastructure in the industry. With a deep history of providing trading technology solutions to leading financial institutions around the world, our FIX Engines have been proven in the toughest of use cases. They are not free!
So how much should customers pay for a FIX Engine? In this article we explore why low-cost is not always good when it comes to trading infrastructure, and why FIX technology is not the commodity it’s ubiquity would suggest. So, while we don’t specify a dollar value, we do think the following ten points are key considerations when addressing this question.
10 reasons why your competitors are paying for high value FIX Engine technology
Not all firms, and certainly not all asset classes are highly latency sensitive, certainly not at the sub-microsecond level. But the industry continues to evolve rapidly, and with the increasing electronification of OTC markets it is likely that latency will become a key factor across all markets at some point.
Given the cost and complexity of re-platforming, it makes sense to invest in technology that not only addresses current needs but will support your business as it evolves.
For many asset classes, however, latency is an important factor, and with sell-side firms competing for order flow in an increasingly crowded market, and under ever greater scrutiny regarding execution quality, the right technology choices can make the difference between winning and losing.
Performance, however, is not just about latency. Message throughput and scalability can be equally as important.
Again, there is the question of whether the chosen technology can support the future growth aspirations of a given business, but also whether it can cope with message rate peaks at periods of extreme volatility. The FX market activity during the early phases of the global coronavirus pandemic being one example.
But the real performance of any FIX technology is truly tested when looking at the impact of throughput on latency.
When markets are busy how does the technology perform? Eliminating garbage collection and the resultant jitter is key to stable latency as market data and order flow drive up message rates in periods of high volatility, and a non-negotiable when it comes to choosing technology.
When designing trading technology, performance is meaningless if the solution is not resilient and reliable.
In competitive, highly regulated markets, business critical infrastructure has to work for as close to 100% of the time as possible. Outages or performance issues can kill businesses – lost trading revenue and potential regulatory fines will cause pain in the short-term, but reputational damage can be irrevocable.
That is why High Availability (HA) design and the ability for seamless failover and recovery are essential elements of both the software design and the architecture of any FIX platform deployment. Choosing a cheaper, but less robust option or saving money by deploying a single instance can prove a costly false economy.
4: Technology Roadmap
Research and development is a core part of any successful technology company – understanding the market, changing customer requirements, and, importantly, technology trends.
Naturally, many trading technology providers focus on extending functionality, often driven by direct customer feedback.
However, do they allocate equal effort to evolving the underlying technology? Many financial organisations today are operating on legacy technology that won’t be able to support their future business plans or is already proving restrictive.
When choosing a vendor, customers should consider whether the provider has a coherent programme for ongoing optimisation, onboarding new versions of FIX protocol, and comprehensive re-testing with every change and software update to ensure performance is not impacted.
This, coupled with a transparent maintenance and upgrade process (including any associated costs) will be key inputs into any technology acquisition decision.
Research and Development is a core part of any successful corporate entity – understanding the market, understanding technology trends, and more importantly, having the time and space to know what to do with them.
As providing technology is an ongoing concern, it is in the life blood of a software provider to ensure that the product is kept current and relevant.
5: Support and Consulting
Other important factors to consider when selecting a FIX Engine provider are both the initial design and implementation support, as well as the ongoing service model.
Different providers have different commercial approaches, so while a software license may be seen as low cost, or in the case of open-source, even ‘free’, the true cost of ownership to the customer can be opaque.
Where firms operate on a professional services and consultancy model, fees can quickly grow out of hand and what initially looked like a good deal can become an expensive overhead.
Another challenge with this model is that ad hoc statements of work and budget approval are typically needed for each request, slowing down the process. This can be challenging where it relates to business impacting service issues, undermining the customer’s responsiveness to its own clients.
Understanding the total cost of ownership during vendor selection is key. The initial price tag is only part of the story, but the value is derived over the operational life of the FIX Engine deployment.
The level of expertise and support offered during design and implementation, a transparent statement of service that details what ongoing support and issue resolution resource is provided, together with clarity on how future functional enhancement requests are dealt with, will help customers understand potential hidden costs and the true ‘value’ of what is being delivered under the initial contract.
6: Flexibility with Custom Protocols
The problem with standards is that they are not always standard!
While the FIX protocol has contributed massively to capital markets interoperability, the reality is that as well as multiple versions of FIX being used across the industry there are also a plethora of custom implementations.
As an example – the EMX protocol is based on FIX, but it is highly customised, using not only custom tags, but also a custom cryptographic signing algorithm.
The FIX Engine software needs to be flexible enough to cope with each firm’s custom FIX dialect. Not only that, but the product must also be easy to adapt, and the vendor offer the expertise and experience to ensure implementation is quick and simple.
A fully supported FIX solution will provide the necessary tools to adapt to such custom requirements, avoiding expensive consultancy fees or the purchase of additional software.
7: Asset Class Coverage
As financial regulation increasingly demands more transparency, a growing number of asset classes are traded electronically.
A good FIX Engine is designed to be asset class agnostic and facilitate different trading types. While a potential customer may be looking at a single asset class ‘point solution’ in the short-term, they should also be thinking about their broader strategy.
Managing multiple technology platforms has become harder as the pace of change in the industry has accelerated. Cross asset regulatory reporting and risk management have also become a growing headache.
Choosing the right solution that can meet current needs provide the flexibility to adapt as a business evolves will help future proof technology investments.
8: Product not Platform
As mentioned, it is increasingly challenging to maintain multiple operating systems and technologies across a financial organisation given the pace of change and operational complexity in the capital markets trading arena.
While there will always be an interconnected ecosystem of applications, software, and infrastructure, firms can reduce some of the pain by centring around a core set of interoperable technologies.
As importantly, they will create a foundational platform (and internal expertise) that will enable them to shift to an innovation and growth agenda and escape the ‘spinning plates’ dilemma of managing a fragmented technology estate.
Thinking strategically about the ‘fit’ on any new technology acquisition must be a key part of the decision-making process.
Having touched on this point previously, it should go without saying that extensive interoperability is a fundamental requirement of any trading technology.
The nature of trading workflow demands seamless integration with both internal and counterparty systems, whether they use common or proprietary interfaces. And it’s not just a question of whether they can integrate, but also how quick, easy, and seamless is it to integrate?
Time to market implies both real and opportunity cost, and poor technology choices can become a major drag on operational effectiveness.
Modern financial markets need open API technologies that allow firms to piece together best-in-breed technologies to solve their business challenges. This is particularly true where the FIX Engine is concerned given its integral function within electronic trading workflow.
10: Company Resilience
Ultimately, when selecting a technology provider, the question of vendor risk has to be asked. Even more so when the technology underpins real-time transactions that are critical to a business.
Obviously, the nightmare scenario is a key technology vendor going out of business, but there are other, less terminal scenarios, that can be extremely detrimental.
Lack of investment to keep technology up to date, inability to provide acceptable levels of support, lack of resource to meet customer project deadlines, functionality failing to keep up to date with market requirements, failure to test releases properly, and so on.
Open-source software can present additional challenge, introducing additional concerns around the components and the varying licenses associated with any chain of dependencies. These can be difficult to track and manage, exposing firms to commercial risk under current terms and the possibility of paid licensing being introduced in future.
That is not to say that open-source, or small new technology firms entering the space can’t provide great solutions. However, it is another consideration when weighing up your choice of FIX Engine and other core electronic trading components.
Open-source libraries with large communities or backed by large corporations can be well maintained and deliver genuine value. There are great examples of industry collaboration on open source-software, such as Linux and Java (the FIX protocol itself is a positive result of collaboration).
But these initiatives have a huge organisational infrastructure behind them, and firms should be wary of using less pervasive open-source offerings in critical, customer facing infrastructure.
Rapid Addition works with leading global financial firms to provide high performance, scalable electronic trading technology solutions.
With performance and robustness proven at tier-1 customers in extreme market conditions, Rapid Addition’s asset-class and message protocol agnostic technology underpins a broad range of trading models and business processes.
To find out more about how our modular technology can solve your needs for client onboarding and connectivity, intelligent routing, risk management, matching and auctions, or any other key component of your electronic trading workflow, then please get in touch through firstname.lastname@example.org.