The Financial Information Exchange (FIX) protocol has become the closest thing to a truly standard form of electronic communication the securities industry has seen to date. Although not yet ubiquitous, FIX has already done a great deal to bring market participants together electronically, easing trading and making operations more efficient. FIX is flexible, having been used by firms for various functions, from Indications of Interest (IOIs) to administrative messages. FIX is also platform independent, and its benefits have been well-reported. In keeping with these benefits, an entire new market inside financial services technology has opened up. The growing FIX engine market, led by vendors such as Financial Fusion and Javelin Technologies, is in itself proof that FIX has been widely accepted in the industry. But FIX is not a panacea for electronic communications in the financial markets. Its purview is largely the trade creation and execution space. The post-trade process is still dominated by proprietary standards or none at all (to its credit, FIX was never designed for anything but the trade process). Further, FIX has yet to take serious hold in asset classes beyond equities, although recent versions have been expanded to include foreign exchange and fixed income. It seems that recent developments will make the standard morph into a new, more communal format, centered on the XML standard. Nowhere is this more evident than in the recently announced partnership between FIX Protocol, Ltd. and SWIFT to create a new standard utilizing the attributes of both into a single, XML-based standard. Along the way, FIX will develop its own XML-based standard, FIXML. One hopes these endeavors do not end up cannibalizing one another, as the value in a combined format is substantial; firms will have the ability to synchronize front-and back-office operations in a way never seen before. This, of course, will greatly help the move towards Straight Through Processing (STP) and, more specifically, T+1 in the US

Simply put, FIX is a language defining specific types of messages, sent electronically, in the process of executing and filling a security transaction. This language is based upon a “Tag=Value” system. It is not software; it is a protocol that defines only the format of the messages and the interaction between two applications sitting at different firms. Because of its flexibility, FIX can be used by firms to define new message types if necessary to complete a complex transaction. Several different message types can be sent via a FIX connection. The standard was designed for use in the front-office environment, including pre-trade and trade operations. Although advocates of the protocol are in talks to expand its usage (discussed later), its current value is in the front-office. One important factor in the success of the FIX protocol is the fact that it is not controlled by one single entity and so can be adapted to a firm’s individual business requirements. The protocol remains vendor neutral, and to date has avoided becoming over-standardized, or too rigid. A firm can implement FIX via one of dozens of different vendor toolkits or FIX-enabled software packages. The “FIX engine” market has sprung out of the need to quickly deploy FIX without intense internal effort. Major vendors in the space include Javelin and Financial Fusion, among others. The fact that this market has grown so quickly is itself a testament to the overall adoption and growth of FIX. FIX in general provides a higher degree of automation. This means a firm can handle more trades with fewer personnel and can process and prioritize information more quickly and thoroughly. Also, FIX can allow a firm to catch errors more quickly and reduce the overall number of errors occurring. Specifically, the reduction of administrative activity among traders (repeated data entry, trade status reporting via phone or fax), made possible by the increased automation brought by FIX, should allow these personnel to handle higher transaction volumes and become more efficient overall, while at the same time reducing the chances for transaction errors.

In December of 1993, FIX was first tested via a pilot between Fidelity and Salomon Brothers After this initial success, a formal FIX Committee was created in mid-1994. A general conference was quickly followed by a new release (2.7) and the first meeting of the FIX Technical Committee, in March of 1995. FIX Protocol Ltd. (FPL) is an organization established as an overseer of FIX, charged with keeping development moving along through the various committees it has created. The mission statement of FPL is: “To improve the global trading process by defining, managing, and promoting an open protocol for real-time, electronic communications between industry participants, while complementing industry standards.” A large cross section of the securities industry takes part in FPL, signaling its growing importance. The firms listed below do not represent all those using the FIX protocol, but rather a representative sampling. New versions of the standard, with improvements designed to enhance its efficiency and usefulness for the buy- and sell-side, as well as increase its reach into the equities trade process, have been released at various intervals, averaging approximately 18 months. The latest release is version 4.3, which includes increased functionality for fixed income and further support for XML. However, new versions of FIX are not readily adopted. Many firms still utilize earlier versions of the protocol, especially version 4.0 because firms are not interested in upgrading technology simply for the sake of being first on the block with it. Nor are they interested in spending the resources necessary to bring their systems through the upgrade process if the new features in a release are not germane to their business needs. Client needs will also have a great effect on a firm’s willingness to deploy the protocol. Merrill Lynch began behind the curve in FIX. It finally came around, only after clients complained and the sell-side behemoth realized it could not provide the same level of service as its competitors. Merrill responded by adopting the protocol quickly, working to provide functionality to clients that demanded it, then growing its usage of the protocol to other firms globally. The number of Merrill Lynch clients using FIX is growing exponentially as a result of that effort. At this point, Merrill supports FIX globally for its equities and fixed income trading operations, but does not yet have a majority of its trading activities being conducted via FIX, even with a large number of clients using the protocol.

The real-time nature of information delivery in the FIX protocol affords institutions with benefits they didn’t have before, when batch-type processes (often conducted at night) dominated securities transactions. These benefits, for both the sell- and buy-side, include improved risk management capabilities, order management functionality, position keeping, and overall efficiency. A good example is the use of FIX by sell-side firms to transmit indications of interest (IOIs) to buy-side clients, which can send back, if applicable, designated order turnaround (DOT) orders to the sell-side. FIX can be used again, in this example, by the sell-side firm to send the order along to the exchange. Additionally, a FIX connection can be configured to handle market data flows. Real-time communication also improves a firms’ ability to compress settlement cycles, necessary for compliance in the US, with T+1 mandated for June 2004. As an extension of T+1 compliance, FIX will help firms conduct STP, creating unprecedented automation in the pre-trade and trade environments (see Celent report “Straight Through Processing: An Overview,” September 2001). Efforts to combine the FIX protocol with SWIFT’s ISO 15022 message type (discussed later) to create an XML-based standard will extend these STP efforts past trade creation and execution, through to clearing and settlement, areas not typically handled by FIX. One interesting component of the newly released version of the FIX protocol, however, is increased support for confirmation and allocation messaging. This capability will allow increased support for firms using FIX to connect to new post-trade matching utilities, such as the GSTPA and Omgeo (for more information, see Celent report “GSTPA vs. Omgeo: The STP Race Escalates,” July 2001).

The growing adoption of FIX will help the protocol become a fulcrum creating easier access to and communication with an increasing number of counterparties and execution venues. This should hold true both in the US and in other markets. While the US leads adoption of FIX, being its point of origin, adoption among firms in other countries is moving quicker, comparatively, than at the same point of uptake in the US. Just as liquidity begets liquidity, it is also the case with FIX in that usage begets further usage. The protocol’s growing importance in the US has led to increasing adoption elsewhere, especially in Europe and the Asia-Pacific region, which is probably the last main frontier for FIX to broach as it moves into position as a key worldwide standard. The latest version of the FIX protocol includes support for certain Asia/Pacific and Japanese requirements. FIX can also be used to increase reach inside an organization by creating links among a firm’s worldwide offices, creating a global book that can bring together all of a firm’s positions, providing an opportunity for better risk management and trading efficiency.

FIX can be utilized easily and for differing communication purposes, creating a scalable solution, since a firm can grow its business in different directions while still using FIX. It will not be forced to adopt additional standards to trade in fixed income, for instance. Another point of flexibility is how FIX can be connected to a financial services firm. For instance, connections using FIX can be created via the Internet. This has two benefits: • Firms can save substantial amounts on costly leased line solutions such as Frame Relay or x.25 lines. Additionally, easier access creates opportunities for a greater number of counterparties. A firm can reasonably expect to expand business, as well as create a more efficient environment to conduct trading with its existing partners. • Smaller firms, without the necessary resources (neither time nor money) to accommodate more expensive technology solutions, can look to FIX to help them create a more automated, efficient front-office presence. Smaller firms, therefore, do not have to lose out to competitors in terms of technology. FIX has the ability to help level the playing field for those firms too small to throw money at technology issues. With expanding globalization and severe fragmentation in the financial services market, firms, especially those in the US and Europe, can more quickly connect to new network points, including additional points of execution and counterparties. No where is this more evident than in the growing trend in the US markets for direct access (see Celent Report “Direct Access, Taking Center Stage,” May 2001). With easier methods of connectivity created via FIX, broker/dealers can offer clients best execution services more easily than before. In this context, FIX acts as a buffer between the buy- and sell-side, creating a way for broker/dealers to add value to their clients in an increasingly competitive environment. FIX, although largely used in the equities market, can be extended to handle several different instruments.

FIX was originally designed for the US equities market, but is now beginning to branch out into other areas. Its next big jump is towards fixed income. Many buy-side firms are looking to use FIX for fixed income, adding to their existing usage of the protocol for equities. One of the biggest features of the most recent version of FIX is the establishment of fixed income transaction capabilities. This functionality was limited only to indications of interest (IOIs) in earlier versions. Foreign Exchange (FX) trading can also be facilitated by using FIX. Accommodation for FX has been built into the protocol since version 2.7, to pair an FX transaction with a corresponding securities transaction. Version 4.1 was the first to provide robust support for FX, and subsequent versions have honed that capability. While competing standards are emerging that can be used in FX dealing, Celent believes that along with the rise in usage among online and automated FX dealing platforms, FIX (or the XML-based version) can garner a large share of volume. This is especially true when considering that SWIFT, a recently announced partner of the FIX Protocol Limited (FPL), is closely allied in the trading and settlement aspects of the FX industry. This is not a certainty, and a major obstacle will be the incorporation of the protocol amongst the platforms themselves. We expect the more recently launched platforms, such as Currenex and FXAll, to adopt some standard for handling communications between counterparties. At this point, FIX is not a lock to take this position. However, adoption elsewhere in the FX industry, a giant at approximately US $1.5 trillion turnover daily, is unlikely. While FIX will continue to act as an enabler for securities-based FX deals, the protocol will not be used among the dealer-to-dealer market, which now counts upon EBS and Reuters for electronic dealing capabilities. Additionally, where these electronic systems are not used, phone-based dealing still dominates. This is true for the dealer-to-corporate market, another large component of the FX industry. While the Internet-based platforms are certainly gaining popularity, the vast majority of dealing still takes place via the telephone. One reason we believe FIX will be effective in broadening its reach in some areas is the adoption it has seen among non-trading institutions. Many ECNs and exchanges now use FIX with their customers, as well as amongst themselves. Clearing firms are using FIX to report completed trades to settlement providers and regulatory agencies. This expanding usage will make it easier for an increasing number of firms to embrace the protocol and use it for ever-widening purposes. The expansion is not inevitable, however. There are various impediments to FIX becoming more prevalent among other asset classes, such as fixed income. • Lower transaction volumes. Fixed income trading does not reach the proportions of equities trading, making it difficult to find efficiencies of scale, though with fewer participants, trade sizes do tend to be larger. • Various asset classes. The fixed income market includes more asset classes than equities, from treasuries to high-yield commercial paper. This creates a scenario difficult to handle for FIX, where each class has certain characteristics that must be accounted for. • Lack of technology. The US and international equities markets have seen a great deal of development in the automation of several areas, including order routing, straight through processing, and order management systems. The fixed income market has not seen similar levels of spending on technology, and many investment management firms still do not utilize an order management system (OMS). In Europe, however, there has been significant automation in both the equities and fixed income markets. Where this is the case, FIX may still not gain traction, as proprietary standards used by exchanges continue to be used. • Other standards. Many firms may be unwilling to take up FIX because they see a general move towards XML-based standards. Although still under-developed, firms may want to wait and incorporate all of their automated trading activities within one, XML-based standard. FIX is developing such a standard, but it may have trouble convincing potential users to take up this standard, considering the many others out there. Other areas FIX is supporting include Collective Investment Vehicles (CIVs) and derivatives. We believe take-up for these asset classes will be somewhat slower, due to issues involving slow adoption of technology among many buy-side institutions and the complex nature of the derivatives market. While FIX is flexible in respect to handling complex instruments, it is not clear if this flexibility will be enough to convince IT professionals to utilize the technology in their derivatives operations, a traditionally OTC market with little-to-no automation. If little initial interest is shown, we believe support for FIX in the derivatives and CIV markets will quickly erode, similar to the FX market. The FIX adoption among CIV and derivatives firms will largely be the result of isolated, point-to-point trading arrangements using the protocol, and not in any industry-wide fashion. Although some view FpML, an emerging standard focused on the derivatives market, to become a significant competitor to FIX, we believe this is unlikely. FpML, if it is successful, will be focused on the OTC derivatives marketplace while FIX’s support for derivatives has been focused on the exchange-traded market, the much smaller of the two.

Another area that FIX may see substantial growth is in the back office. Extensible Markup Language (XML) is quickly becoming widely used throughout the financial services technology market. FPL is constructing a FIXML standard (alongside new versions of FIX) to meet the needs of the industry in this regard. It appears that along with FIXML, FPL will also work with other groups to reach this goal. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) has developed a new standard to be used on its network as a tool for the clearing and settlement of securities transactions. The SWIFT ISO 15022 messaging standard was slated for the first phase of adoption in November 2001, when financial institutions were required to be able to receive the new message formats. Complete conformity with the format is mandated for November of 2002, when SWIFT will no longer support ISO 7775 messages. The 7775 messages were deemed no longer able to handle increasingly complex transactions in the securities markets. At that point, FIX and SWIFT plan to converge. From the ISO 15022 standard will come a new, XML-based standard, ISO 15022 XML. This standard is being developed by the ISO’s Working Group 10 (WG 10), comprised of industry participants. The new ISO 15022 XML standard will not, however, be a recast of the ISO 15022 into an XML format. Rather, it will draw on a new XML vocabulary and be more advanced in its capabilities. FPL, in a significant announcement earlier this year, announced they will work with WG 10 to jointly develop the ISO 15022 XML standard, which will create one standard for all of the functions previously handled separately by FIX and SWIFT. For the first time, front- and back-office applications will be handled by a single standard. ISO 15022 XML is due for completion in November of 2002. SWIFT has used these types of alliances as a way to break out of its perceived role as an exclusive banking/payment messaging services provider. The use of XML will allow SWIFT to continue to attract potential partners, since most industry standards organizations are beginning to see XML as an important component of their strategies. If SWIFT, a known player in the industry, is extending a hand to help other organizations push XML-based standards along, then these other groups are likely to join. FIX can be integral to a firm’s attempts to automate and move towards straight through processing. ISO 15022 XML builds upon these capabilities, providing the opportunity for a firm to create an almost entirely automated standards-based trade operation, from creation to settlement. It also portends a move by FIX into the post-trade execution space, a major shift for the protocol, most often seen as a front-office tool. Its extension into confirmation, clearing and settlement will be tempered by the usage of ISO 15022 (and older standards) in this area, but it is clear that FIX, with this recent announcement, is broadening its reach. An indication of the intent to move towards ISO guidelines is apparent in the most recent version of FIX which embraces several ISO standards. These changes include: • The introduction of new exchange identification codes to those used by ISO, the Market Identifier Code (MIC). • Representation of security type is also ISO-based, using the CFI Code (Classification of Financial Instruments). While FPL is now working to create an XML-ready version for its inclusion in the ISO 15022 XML standard, it is still likely to release new versions of FIX beyond 4.3. Firms looking to embrace standardization, but have yet to do so, will likely find a confusing road map going forward. We believe that, as in the past, previous versions of FIX will remain, creating opportunities for firms to more easily enter the standards space. If, as is planned, the new ISO 15022 XML standard is released in November 2002, firms will then be afforded an opportunity to move to the new standard. We believe many firms will, but there will still be a large portion of the industry still wedded to older versions of FIX as before. An attempt to embrace XML right now may put firms too close to the bleeding edge, creating problems with implementation and counterparty coordination. FPL will also continue to support the FIX protocol until widespread adoption of ISO 15022 XML takes place, and then will move on to manage the ISO’s pre-trade and trade business models. In short, FIX will continue to exist for some time to come, and firms interested in getting involved with the standard at this point should not hold back plans to do so.

FIX has become a major factor in the US equities markets, and is growing in its reach. It continues to support new asset classes, and is making significant inroads throughout the rest of the world. Hundreds of the major buy- and sell-side firms have adopted the technology, and a slew of vendors are making it possible for smaller firms to take up. There are several pertinent points to be considered when undertaking a FIX implementation or upgrade. • Automation. FIX will continue to act as the main force behind increasing automation in the securities market. Firms looking to cope with STP and T+1 issues will need to embrace new versions of FIX to help make automation a reality. • Liquidity. FIX certainly helps a firm connect with counterparties and create a more efficient atmosphere for trading. But it also creates additional liquidity. Firms can use FIX to link to networks of potential counterparties. • Reach. Equities are most fully supported right now, but FIX is working towards, and we believe, will ultimately be successful in trading additional asset classes, like fixed income. However, we do not believe this shift will happen any time soon. Issues inherent in the asset classes as well as a reluctance from the buy side will delay widespread FIX adoption in those areas for several years. Other asset classes, however, will not adopt FIX in any meaningful way. The foreign exchange and derivatives markets are the least likely to adopt FIX for across-the-board use at any point in the future. • XML. FIX has stated its intention to move into an XML-based format via its announcement to co-exist with SWIFT. This is a promising development, but is several years away from reality. Firms must look first at the near-term before considering the adoption of XML technologies. Not only will it be some time before they are ready, take-up for these standards will be several years. We believe a prudent plan calls for FIX implementation at the most recent version possible along with a wait-and-see approach to XML. By using a recent version of the standard, it will be easier for a firm to make the migration to XML. • Equities won’t budge. Equities markets, having used FIX for several years, will see little, if any, migration to an XML-based standard. Firms will be reluctant to switch technologies when FIX is so well-entrenched among counterparties. While additional clearing and settlement functionality may be available via an XML-based FIX protocol, it will not be enough to convince most equity players to switch. • The snowball effect. We expect FIX to only grow in popularity. This is due to the fact that a) global expansion is made easier by the established base of FIX users in the US and b) firms that have already implemented FIX are more likely to leverage that investment and create additional links and/or expand the asset classes the protocol covers within the firm. This will pre-empt any early gains that new standards may have. We also believe that older standards will suffer in use as FIX becomes more popular, in the US and overseas. • . Although the FPL is trying to avoid it, there is a danger that FIX can become, because of its inherently flexible nature, overly customized. This will be particularly troublesome when a firm attempts to bring on a new counterparty, and extensive back-and- forth testing must be conducted. A similar problem can present itself if too many versions of the FIX protocol abound, such as FIXML along with an ISO 15022 XML-based version. Certification tools are available to help alleviate this problem but firms now implementing FIX will find a somewhat difficult process before them.