High Frequency Trading Review


    An Interview with Hugh Hughes and Bob Fuller

    In this interview for the High Frequency Trading Review, Mike O’Hara talks to Fixnetix executives Hugh Hughes, Chairman and Chief Executive Officer and Bob Fuller, Director.

    Fixnetix provides outsourced services for ultra-low latency trading, market data, hosting and infrastructure connectivity as well as risk management solutions to leading global banks, hedge funds and proprietary trading groups.

    High Frequency Trading Review: Hugh, maybe I could start by asking you to give us a brief overview of Fixnetix.

    Hugh Hughes: Certainly. What we do for a living is outsource or “manage service” the front office. As you know, many investment banks, hedge funds, investment companies, market makers and other trading firms outsource either all or part of their back offices. But the focus is now changing and firms are asking, “well if we did the back office, why can’t we outsource the front office too?”. Up until now, it’s never really been possible because the savings weren’t enough to make it economically viable, but because of the way the market has evolved, that situation is changing. In Europe, MiFID is part of it because firms are now having to maintain so many different connections to so many different trading venues, MTFs, stock exchanges, dark pools, etc., meaning the connectivity aspect is not as simple as it used to be.

    Our aim as a company is to give one connection, one piece of wire if you like, which has every asset class on it, connectivity to every stock exchange in the world, everything in one go. We are not quite there yet because it doesn’t exist yet but when it does (and I would say we are pretty close), it will allow firms to not have to worry about how and where they connect, they just have it all in one wire, click it in and off you go.

    HFTR: With the proliferation of MTFs and dark pools around the world, doesn’t that give you a major headache in terms of staying on top of all that connectivity and having to keep up with the diverse technology at each trading venue?

    Bob Fuller: Well, it’s not so much a headache as a business opportunity! We are very much demand driven, so we don’t connect to an MTF if none of our customers wish to be there. With some of the new trading venues, it’s obvious there’s going to be demand, you just have to talk to two or three customers to know that they’re all going to want to go there, so you get in there early and sign up. Other ones it is not as easy as that, so you then have to come up with some sort of agreement between your customers as to whether they want you to provide connectivity or not. But the proliferation of trading venues has been great for Fixnetix because obviously it makes the whole thing far more complicated for market participants to maintain themselves, they want to give it to somebody else and that is our job.

    HFTR: So it’s core competecy for you whereas it may not be for your clients?

    Bob: Exactly. And as the markets develop, as more instruments across asset classes become traded on exchanges (whether you call them Swap Execution Facilities or MTFs or whatever), there will be a greater level of complexity across all these other instruments and that’s where we see Fixnetix having a tremendous advantage going forward. We can take that complexity away from people and say, “you know your OTC business that’s all done on voice? Now its going to be done in this new environment, do you really want to build that from scratch or do you want to go to somebody who can say ‘here it is’ ?”

    It’s highly likely that most of these new trading venues will be run by people who currently run an MTF or an exchange, so we’ll probably already be in the co-location facility, which means for us it’s just another connection across our backbone.

    Where the market is becoming increasingly complex, we take away that complexity. In Europe in particular you’ve got many exchanges where their native language isn’t English, so one of the big things we offer is a single contract, you sign with us and then we deal with the Italians, the Germans, the French, the Spanish, etc, we’ve contracted for the line in the ground, we’ve contracted with the co-lo and the various service providers and so on. If you think about time to market, where you want to go into this new business but it’s geographically spread over Europe and you’re having to deal with multiple venues, multiple vendors, multiple service providers, how much time is your legal department going to spend on all of that?. Whereas if you go through Fixnetix, you don’t have to worry about entering into all those complexities of contracts, that is our job!

    And the other thing is, if for instance we find that our line between London and Frankfurt is no longer the most reliable or no longer the fastest, we’ll swap it out and put a different line in. You don’t have to worry about that, you contracted a service with an SLA so we take care of the rest. That is very important to a trader who really doesn’t want to understand IT, he just wants to get on with his business.

    HFTR: On that note, do you expect the current level of fragmentation to continue or would you anticipate more consolidation across the various trading venues?

    Bob: There are a couple of things to consider. As far as the equity markets are concerned, proposed legislation says that all the brokers’ crossing networks are either going to have to be systematically internalized or become MTFs. Then you’ve got the recent announcement of Goldman working with NYSE to create a new MTF. So whereas we might have thought previously that the venues were going to consolidate, now they may be more likely to fragment further.

    HFTR: And then you have all the new asset classes and so on…

    Bob: Well, that will definitely create huge numbers of new connections. It’s interesting actually, our model at the moment is that we connect all these big guys to the exchanges, but if you turn the model upside down and you realize that they all now need to talk to each other electronically, Fixnetix is probably in a very good position to create an electronic trading network for them, particularly with OTC becoming much more electronic, where you’ve got to do trade reporting within 2 minutes and so on. We have 10 Gig around the world, so we think we can turn our network up the other way and facilitate that connectivity much quicker than they could do it otherwise.

    HFTR: Are you saying that Fixnetix could become an exchange?

    Bob: We will become an exchange of information, I don’t think we will become an exchange per se. I don’t think we will match trades or anything like that because that whole regulatory environment is not where we want to be, but in terms of creating the ability for the information to be moved in a very cost effective, heavily resilient manner, we can do that, certainly.

    HFTR: You recently announced the launch of your iX-ecute chip, for which you’ve also filed a patent. Can you tell us exactly what it does, who is is aimed at and why is it such a big deal?

    Bob: Basically what it does, it allows a pre-trade risk check to happen before an order gets to the exchange. One of the big problems in the market recently, mostly in the States rather than Europe, has been around so-called “naked access” where, as an exchange member, you give somebody the ability to use your name and connect direct to the exchange. If their algorithm or whatever does something strange, then it can have a significant effect on the market. The problem with naked access is that nobody was really checking what was going on.

    So for risk purposes the regulators on both sides of the Atlantic have said that access using someone else’s name needs to become “sponsored access”, with pre-risk checks happening between the time the customer issues the order and the time it reaches the exchange. The sponsoring broker has to control whether that deal gets to the exchange, depending on whether it’s within the tolerances of their customer’s capital etc., being checked on a pre-trade basis.

    One of the reasons this hasn’t been done in the past, is because of speed and latency. If you have somebody who’s latency sensitive and it’s going to take them 10 seconds to do the check, then they’re not going to want to do it.

    So the idea of doing that in firmware allows those checks to happen on the fly without materially affecting the speed of the order getting to the exchange. And the faster you are in doing those checks, the more of interest it is to everybody because it means that the people who were screaming for naked access will now accept this very short time period to do these checks. That is the reason why the iX-ecute chip is so important. What it does, it basically takes orders in, checks them against a whole set of limits – which the sponsoring broker defines and can check and change during the real-time day – and then passes them on to the various exchanges in the format that the exchanges want, with negligable latency.

    HFTR: How programmable is the chip in terms of the broker being able to define those limits?

    Bob: There are a whole set of parameters that you can set around what sorts of checks you want done, so we do about 5 checks on the fly, based on whatever the sponsoring broker wants to have. The checks are fully configurable by the sponsoring broker, for each individual client using the chip.

    HFTR: So presumably the target market for this chip is the sponsoring brokers, the member firms, rather than the end clients or the exchanges themselves?

    Hugh: At the moment the chip is designed to address the problem of pre-trade risk in the high frequency space, so it’s of interest to MTFs, exchanges, dark pools, the clients themselves, the hedge funds, there is a whole range of interested parties.

    Going forward, we want to put everything on one chip, not just pre-trade risk for high frequency trading.

    HFTR: Everything being what, exactly?

    Bob: I think that depends upon how the markets shape up. At the moment, if there were no external influences in the market, then I would have said speed becomes ever more important, so more things are going to move to hardware. But looking at some of the external factors, fragmentation is occuring in all these other markets, if you think about some of the trading systems that exist now for voice markets for example, which are all going to go electonic. So the growth in our business is going to be more towards that initially, and then hardware is going to be coming for each of those markets. The equities markets in particular are very much already there.

    Hugh: We started off at the fast end with equities because that’s where the need is now, but we intend to roll it out (hopefully in the next year) on all asset classes for every product in the world. And it will just revolutionize the way business is done.

    HFTR: Aside from pre-trade risk and sponsored access, how else are changing regulations impacting your business?

    Bob: Overall I think the changes being proposed, if they happen, will affect us tremendously because there will be a whole load more instruments coming into the same space. One of the biggest problems that market participants have been having, is just the sheer amount of change that they are being asked to look at on both sides of the Atlantic at the same time, meaning that more and more of them are saying “this is too hard, can somebody else please take it?”. That’s another reason why we are on this huge growth path. Even the big Tier One banks are finding that keeping up with some of these changes is just too complicated and costs too much money.

    HFTR: So are the Tier One banks your main target market?

    Hugh: Our client basis is diverse. It is investment banks definitely, it is market makers, it is hedge funds, it is the medium size banks as well. The type of system we are building is for everybody, it is different for certain people than for others because they want certain parts of it, so it is not an easy answer. If you look at our spread, we got a very good list of investment banks, we’ve got over 75 clients. And we’ve got market makers, we’ve got spread betting companies. If it’s the system that they need, then it is dead simple, they don’t have to have co-location or lines in the ground, we do it all, computers, the right system, the right connections, one stop shopping

    Bob: And we’ll even run their computer systems for them. We often run Software as a Service for them where they don’t have the expertise to do that internally.

    HFTR: So you are hosting their black box trading systems as well?

    Bob: Yes, we actually host 3rd party trading systems, we will run them in a co-location facility for our clients and manage those systems for them on a day to day basis. We actually have 3rd party reseller arrangements with a number of trading systems vendors around the world.

    HFTR: That must present you with challenges in terms of trading errors or problems arising from trading algorithms?

    Bob: Well, we’re not responsible for writing the algorithms.

    HFTR: No, but you are running them.

    Bob: There is difference between running a 3rd party trading system, which we do quite a lot of, and running somebody’s algos. If we’re running somebody’s algo, we supply them with the box and we manage the lines and the hosting, so we are looking after the fact that the box has power, that it’s connected up, that the algo is being called, etc. Anything in terms of the software they have written, that’s theirs, they look after that. We give them the trading connectivity and the market data connectivity they want, but the black box is theirs.

    If we are running a standard off-the-shelf trading system, one for example which is currently sold to a number of banks but our customer wants to buy it through us because they want us to manage it, then we do take control of that and we will take first line support on that. But obviously if you’ve written your own algo, you support it, you look after it, you have responsibility for it.

    HFTR: Geographically, where is most of your customer base?

    Bob: We are big in Europe, we have a fairly large footprint in US, we have been building out for other European organizations that want to trade in the US, but we don’t actually market ourselves in the US yet, although we would look to do that soon.

    As for Asia, if for example if one of our European clients says, “actually I would like a co-location box in Australia”, then we will look into it and quote them a price. If they want to pay that we will build it for them and offer the same sorts of services we offer elsewhere. But we are not in Asia per se, we don’t have a sales force in Asia and I would say our Asian presence is fairly minimal compared to the US. So in terms of our geographic footprint, Europe is very large, America pretty big, Asia patchy and that is because we are demand-driven by our clients.

    HFTR: What about competition? Do you see your competition mainly being other suppliers in the industry or proprietary systems that firms have developed themselves?

    Bob: Probably internal IT, although they are becoming less worried about us because they’ve got so many things to do and not enough budget to do them with. And we also generally come in as an operational rather than a capital expense because you don’t have to have your own equipment, you can lease it from us, etc. So it depends on what the company is trying to do, we allow that total flexibility as to what suits their business and I think that is what makes us unique in this space.

    HFTR: One final question. Do you have any plans to get involved in the strategy generation side of things?

    Bob: No I think that’s more our customers’ job.

    Hugh: We don’t want to be competing with our customers, we just want to do exactly what we do, which is manage the front office with, as near as we can get to it, one wire that just plugs into your computer and it does everything. As I said, it is a bit of a way off, but that’s what we’re working towards.

    People have trouble getting their head around what Fixnetix is. The big thing about us is we are that one stop shop in the front office. If you want to outsource anything from running a trading system through to market data, through to co-location, anything associated with trading any instrument, then come and talk to Fixnetix because we can probably help you. That makes us very different to most of our competitors, who might compete with us for this bit or that bit, but really we are the only people who do that over-arching, “what do you want us to do, what part of the jigsaw do you want us to provide, where do you want to build and plug in your bit?”. So that is the other thing, we don’t mind if you say to us, “actually we would like you to manage this bit, can you plug it in here?”. As long as commercially we can do it, we will do that, so we don’t mind that at all

    The whole market place four years ago was an entirely different place to what it is now. It is changing but we are rapidly following the changes and it is a very exciting business to be in.

    HFTR: Thank you both.


    Mr. Hugh Hughes serves as Chairman and Chief Executive Officer of Fixnetix Ltd. Mr. Hughes serves as Chief Executive of Fixnetix, Inc. Mr. Hughes has more than 30 years’ experience in investment banking and the financial services sector. Until October 2005, he was Chief Executive Officer of the London arm of Thales Information Systems, a leading provider of consultancy, systems integration and outsourcing services. Before joining Thales, he set up ITGE, a joint venture between ITG and SGSL. (global crossing.) Prior to these appointments above, Mr. Hughes held the position of Chief Executive at SG Securities Ltd (SGS) for over ten years.

    Mr. Hughes started his career at Wedd Durlacher in 1968 and was the youngest person to make partner at WDM (BZW) in 1981. After 4 years, Mr. Hughes left to develop Savory Milln International where is negotiated the sale of Savory Milln to SBCI (UBS) in 1987.

    Mr. Hughes has served on a number of committees including the SBCI (UBS) Executive Committee, the New Integrated London Office Executive Committee and was nominated to the Council of the International Stock Exchange in 1990.

    Mr. Hughes is an active member in the philanthropic community in the United Kingdom and numerous other countries.

    Bob Fuller was Chief Executive Officer of Equiduct, an organisation created to provide MiFID compliant trading services and equity best execution on its Belgian regulated pan-European electronic exchange. As CEO, Bob was responsible for driving Equiduct’s phased roll-out plan and developing a broad range of service propositions to help European financial institutions via its own Pan-European regulated exchange or as a white label product to systematic internalisers or financial institutions that want to operate their own trading facilities. Equiduct’s goal is to help organisations cut the cost of their MiFID implementation.

    Bob Fuller joined Equiduct from his previous position as Director of IT Strategy at Dresdner Kleinwort (DK), where he focused on infrastructure, exchange connectivity, Swift connectivity and centrally-cleared products including exchange-traded derivatives, equities and bonds. In addition to his work at DK, Bob was also co-chair of the IT sub group for the MiFID Joint Working Group set up to evaluate MiFID legislation and its impact across Europe.

    Earlier in his career, Bob Fuller was co-chair of the GSTPA Technology Committee from 1999-2001. Other roles included Managing Director of a software company specialising in middleware and wholesale banking data warehousing. Prior to this, he was director of Charterhouse Bank responsible for the middle office and IT development for complex financial engineering. From September 1997 to April 1998 he was Deputy Head of IT at Pru Bache Securities (UK) Ltd and from April 1987 to August 1997 he was Vice President, Group at Chemical Bank various roles including Internal Audit, Deputy Financial Controller, Head of Off-Balance sheet systems and Head of Securities Settlement.

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