It is only a matter of time before a subset of US swap contracts listed on swap execution facilities (SEFs) are liquid enough to support potential high-frequency trading (HFT), but messaging specification body FIX Trading Community is working to make sure the FIX protocol is prepared for the eventuality.
“At least a portion of swap trading may migrate to higher performance environments,” says Sassan Danesh, co-chair of FIX Trading Community’s global fixed income subcommittee and managing partner at industry consultancy Etrading Software. Likely candidates might include benchmark swaps like the two-, five- and ten-year interest rates swaps and certain credit default swap indices, he adds.
Leading SEFs like BGC Derivative Markets, Bloomberg, GFI Group, ICE Swap Trade, MarketAxess, Tradeweb (TW and DW), Tradition Trad-X, trueEX and Tullett Prebon currently offer a FIX-based connectivity option after working closely with the industry body
“The initial discussions we had with dealers and SEF operators were about whether we as an industry wanted to commoditise or standardise connectivity,” says Danesh. “Similar conversations in cash equities and foreign exchange markets ended a while ago, but pretty soon we found that the same thought processes are happening in other asset classes.”
The latest core version of the protocol supports message response times in a few milliseconds, he says. However the global fixed income subcommittee is participating in a broader FIX Trading Community effort to develop a higher performance version of FIX specification, which would support response times in microseconds.
Danesh acknowledges that the over-the-counter portion of the new specification likely will leverage the performance advancements designed for the cash equities, listed derivatives and FX markets.
This work comes during a relative quiet spell for the industry organisation, swap-trading venues and market participants as the US OTC derivatives market enters a “business as usual” phase and Europe ramps up changes to its derivatives markets.
According to Danesh, this could give the FIX Trading Community, and the industry as a whole, a chance to get in front of the regulatory changes rather than reacting to them.
“There’s an opportunity with MiFID II in Europe and other regulatory regimes in Asia, as they start to move swap trading onto electronic platforms, to make sure that we bring along the work we’ve accomplished with SEFs,” says Danesh.