FIX Protocol–The Journey to Frictionless Electronic Trading

The Financial Information eXchange (FIX®) Protocol is an electronic communications protocol for real-time exchange of securities transaction information. It’s vendor-neutral and is used by the entire secondary trading community comprising of thousands of brokers, banks, investment managers and hedge funds. It is supported by the FIX Trading Community members, who believe that standardised communication improves financial markets. This community includes nearly 300 member firms, including all major investment banks. Let us look at how it became what it is today–read the story of its creation, establishment, current state and plans for the future.

Early Beginnings: Salomon Brothers and Fidelity

The FIX Protocol, now integral to electronic trading, had humble beginnings. It started as an experiment between Salomon Brothers and Fidelity, aiming to automate sending execution reports and Indications of Interest (IOI) transmissions. Initially dubbed SBX (Salomon Brothers Exchange), the protocol was first used in 1993. Recognising its potential, Salomon and Fidelity invited Goldman Sachs, Putnam and Robert Fleming to join the initiative, which led to renaming the protocol to the Financial Information Exchange Protocol, or FIX.

The First Public Release of the FIX Protocol

Robert Lamoureux and Chris Morstatt released the first public version, FIX.2.7, in 1995. This version included session layers, application messages for execution reporting, IOI distribution, order handling, and basic allocation information. At less than 100 pages, it offered 17 application messages and 103 fields, supporting only equities. Only around 20 pages described how to use the protocol, which led to expansive interpretations of the specification, a problem that persists today! Despite its simplicity, this early version laid the groundwork for future enhancements and industry-wide adoption.

Evolution and Expansion

By 2003, the FIX specification had grown substantially, leading to its division into multiple volumes and the introduction of the FIX Repository in a machine-readable format. Today, the specification contains 168 messages and 7,868 fields, covering all asset classes and a comprehensive set of functionalities for the most popular electronic trading workflows.

Broadening Adoption and Market Impact

Following the successful proof of concept, FIX rapidly gained traction. By 1998, it had become a staple in electronic trading, significantly reducing the need for trader intervention and paving the way for automated trading processes. The protocol’s adoption was further accelerated by regulatory changes such as the sanctioning of ECNs in 1998, US market decimalization in 2001, and the introduction of Reg NMS and MiFID I in the US and Europe. The 2008 financial crisis gave further impetus, with the G20 mandating that trading workflows should be electronic where possible.

FIX Protocol’s Role in a Changing Market

FIX’s efficiency gains in equity trading naturally led to its adoption in other asset classes such as fixed income, derivatives, and forex. It has become the de facto messaging standard for pre-trade and trade communication, supporting order workflows, market data, price dissemination, and increasingly post-trade workflows as the industry strives for greater automation. The FIX Trading Community also agreed to collaborate with SWIFT and ISO. Now, the post-trade pre-settlement workflows can be expressed in both messaging standards, using a common repository for functions such as allocation and confirmation messaging.

Challenges and Future Directions

Despite its success, the journey to complete standardisation and frictionless trading continues. The industry still faces challenges in areas such as client onboarding and conformance testing, which require significant manual intervention. The FIX Trading Community Global Technical Committee is striving to address such issues through initiatives like Orchestra, which aims to create a standard for machine-readable rules of engagement between counterparties. Rapid Addition has been using a workable subset of Orchestra to support our clients since 2005 and continues to support FIX trading to make this a workable standard.

A Vision for the Future

Greater automation and higher levels of interoperability are seen as the next phase of FIX’s evolution. The goal is to achieve the same level of plug-and-play compatibility that has become commonplace in other industries. These aim to reduce costs and complexity in electronic trading–increasingly imperative as margins continue to shrink. A key part of this vision is to empower end clients and position brokers as genuine partners in helping them achieve their trading objectives.

Conclusion

FIX has remained focused on making trading more efficient but significantly advanced its original vision to include almost all asset classes along with wider aspects of the trading workflow. The path ahead involves striving for frictionless trading through greater levels of automation, ensuring that connectivity teams are involved only on an exception management basis. This mirrors the evolving role of sales traders, who now focus on the most significant trades or when issues arise, with most orders increasingly executed as low touch. Since its inception some thirty years ago, FIX has grown to become the dominant standard in global electronic trading, creating the interconnectivity that helps power modern capital markets. Given the industry’s reliance on the protocol, it will continue to do so for many years to come.