Brokers, exchanges, and clearing houses must make implementation of the Future Industry Association (FIA)’s execution source codes a priority to reduce friction in brokerage settlement according to the head of strategy for FIA Tech.
“In the absence of the tag, the clearing broker has no idea how the trade was executed and effectively they are using kludges to best estimate how the trade was executed. That can lead to problems," says FIA Tech’s Mark Davis.
FIA Tech is a subsidiary of the FIA.
“Vendors like everyone else only have limited resources and unless the industry make it clear that this is a priority, then the vendors are going to put their resources into other initiatives that their clients are saying are a priority," says Davis.
In December 2018, the FIA published guidelines to standardise the way of communicating a trade’s execution method. Using the FIA’s guidelines an execution broker will enter one of six codes into the Tag 1031 field in the FIX order message for each trade.
The FIA announced on November 17 that CME had successfully implemented the association’s standard for tagging order messages with a trade’s execution method on the exchange’s Globex platform. CME is the first to fully implement the six codes.
A CME spokesperson said in an email that “all technology work for the firms and third-party software vendors was completed before the November 17 launch.”
The codes are expected to eliminate challenges around the settlement of brokerage fees, but Davis acknowledges there could be hurdles to overcome if a value is incorrectly inputted into the field.
“If a broker erroneously tags an electronic trade as a voice trade, yes absolutely, if differentiated pricing is used the executing broker and the clearing broker or the client are going to have a disagreement as to how much the brokerage should be on that trade,” he says.
While CME has been the only exchange to make the standard mandatory, Eurex, the Intercontinental Exchange (Ice) are also supporting the initiative. Recently Borsa Italiana said it will be implementing tag 1031 in its upgrade to its Sola trading system in February.
Unlike CME, Ice has not made the standard compulsory. However, conversations are ongoing as to whether Eurex will decide to follow CME, according to Davis.
“There are certainly some benefits for making it mandatory in terms of the quality of the data that comes out and for this reason we are advocating that exchanges make population with valid values mandatory. And on the exchanges where it is not mandatory, we are really wanting brokers, if it is available, to make appropriate use of it,” he says.
Davis says discussions are ongoing around implementation with other exchanges.
“We have had positive conversations with ASX. We still have to confirm this but we do hope that at some point in H2 of 2020 they would be able to start development. Again, that is subject to confirmation,” he says.
“With Euronext and Nasdaq, again we have had positive conversations which are continuing. In principle they get the purpose and value. It is really a case of whether they will be able to put that into their roadmap and then whether they will make it mandatory or go down the best practice route ICE took.”
There hope to expand upon those six codes at some point, says Davis.
“I would like to have conversations with the industry starting early next year to talk about how best we approach this. For example, firms may have multiple algos and want to charge different rates for these or multiple vendor platforms on offer. The current methodology doesn’t allow for this type of pricing differentiation.”
*This article was updated on Dec 5.