Institutional investors may gain easy access to a bonanza of equities execution data as the Americas buy-side execution working group of standards body FIX Protocol Limited (FPL) examined whether to adapt its messaging protocol and execution venue reporting guidelines to support data on where orders were routed, but not filled.
The FIX protocol's three current messaging tags define: whether a trade was a principal or agency trade; on which market it was executed; and whether the trade added liquidity, removed liquidity, was routed out or took part in an auction (tags 29, 30 and 851 respectively).
By analysing sub-order routing data, buy-side firms could better grade the performance of individual trading algorithms and venues and eliminate the poorest performer, says David Lewis, head trader for US stocks at Franklin Templeton Investments (FTI).
"The idea sounds good conceptually," agrees Brian Lees, co-chair of the FPL working group and manager of application development at The Capital Group Companies. "But when it gets down to the details, you have to be careful for what you ask."
Of devils and details
The FPL working group has been investigating issues relating to how buy-side firms might handle the additional data volume and whether brokers would be willing to provide it since its February meeting where Barclays presented work it had been doing with leading institutional investors like FTI, Putnam Investments and Wellington Management since the summer of 2012.
"We have a working group of approximately 20 buy-side firms," says Linda Giordano, director of equities at Barclays. "Member firms are different sizes, but they all want to answer this question about the footprints their trades leave."
Everyone involved in the discussion acknowledge that the buy-side will receive a significant amount of added execution data than they currently receive, but no one knows how much more it will be.
Jeff Alexander, director of equities at Barclays, estimates that the ratio between routed orders and their fills could range from 0.5:1 to 1.5:1, "which is a very rough estimate".
FTI's Lewis, on the other hand, estimates a ratio somewhere between 5:1 and 10:1, based on his experience.
Other new data elements up for inclusion in FIX protocol include algorithm names, level of aggressiveness and original routing destinations, but Alexander insists the FIX message will also need to include a snapshot of when the trader or smart order router decided where to route the order.
Few institutional investors have the resources to marry their broker execution reports with their own market data feed, he explains. "It's tremendously expensive."
Even if institutional investors relied their broker for market data, processing the data is not without costs.
"If the brokers sent all the sub-second ping messages into our systems using the FIX protocol, I'm not sure if we could handle it," says Lewis. "It would be great to receive that data and analyse it, but we would probably have to receive it in some sort of batch file."
This has not stopped FTI's plan to buy a complex event processing (CEP) platform to mine its sub-order routing data in real time.
Smaller buy-side institutions with limited IT budgets likely will receive the same data in an end-of-day batch file.
All of this might be moot if the broker community decides not to provide data.
Many brokers have trepidations, says FPL's Lees. "They are concerned that third parties could deconstruct their trading algorithms by looking at where they routed trades but didn't get a fill."
For global brokers like Barclays providing such data is not a problem as long as it can be done in a standard format, according to Barclays' Giordano. Her firm has been providing sub-routing data to certain clients in what she says is an interim fashion.
If the project goes ahead, FPL can provide support by adding message types to the existing protocol and releasing them via a future extension pack or repurpose existing message types to support new data.
'Hacking' the protocol could lead to faster deliverables and quicker adoption, but only firms with flexible order and execution management systems would be able to take advantage of it, according to Barclays' Alexander. Firms that use third-party platforms would need to wait until their vendors rolled out support.
Giordano describes the current conversation between external parties and the FPL working groups on these points as "fluid".
The next step for the FPL working group is to preform a case study in which Barclays provides each working group member with the sub-order data related to various representative trades made by their firms and discuss them at the next working group meeting slated for later this month, according to Lees.