XML - Moving to the Next Stage

Old XML hands will already be well aware of the benefits when it comes to messaging and data storage. They will be au fait with the advantages and appreciate that it is now a well-established standard. However, as the standard has evolved, it has become more than a messaging system. There is a sea-change underway which will see XML move from being just a messaging system to becoming one which can coordinate workflow between banks and their customers.

It should be an inevitable move but one that is hampered by the legacy of electronic trading and its origins. When e-trading started it just applied to spot trading in foreign exchange. Gradually it developed to encompass other asset classes such as bonds, fixed income instruments and the money markets in general.

Inevitably it has meant that a plethora of trading systems has sprung up and been developed and adapted over the years. As a consequence, straight through processing (STP) has been hindered. Market makers have had their own feeds to the back office, to the credit department and the rates system. Customers have maintained a similar infrastructure and have not yet been able to integrate all systems so as to enable back offices to speak directly to traders via only one link between them.

The overriding advantage of XML was to create compatibility between systems so that when trades appear in back office systems they also appear on customers’ general ledger systems, providing connectivity in real-time. The proper use of XML should entail coordinated workflow.

When markets are moving, XML systems genuinely come into their own as they enable real-time trading and quicker, more informed decision-making. Traders will be well aware how an inopportune comment by a politician can send a currency up or down. In choppy market conditions XML will make the difference between trades being profitable or unprofitable by allowing wider spreads. Prices are auditable and traceable. It allows flexibility in both RFQ and ESP trading.

However the legacy of the development of XML means there are a variety of standards – TWIST, SWIFT, FIX, FpML, IFX to name but a few. TWIST is endeavouring to collaborate with other standards instead of competing with them. TWIST aims to incorporate all different standards and expand its coverage that incidentally demonstrates another XML benefit – the growth of new business.

Of course for the big corporates – the Shells and GEs for instance – the multitude of systems is not an insurmountable problem. They have the financial muscle to operate with the additional overheads of 10 to 15 different platforms. Smaller companies, so-called mid-players, will be less sanguine about the additional cost, and rightly so.

Some systems on the market have the advantage of interfacing easily with other standards as it is based on TWIST messaging. It removes the need for organisations to have several different platforms. For instance a bank which deals with established markets but which has interest from a customer in receiving prices on emerging markets would, without XML, have to add another platform for that customer. With XML you only need one platform.

The advantages for banks to use XML and interfaceable systems are clear. They can offer a much better value-added service to customers. They can message customers much more efficiently. And in a virtuous circle they can cut customers’ transaction costs and therefore improve their retention rates.

Additionally, customers benefit as they receive more data that can in turn be passed on to their customers. This can enable white-labelling services for e-trading between banks and brokers. Everyone in the marketplace is working towards the same solution where they can have one platform which will reduce costs and enable them to expand operations quickly and efficiently. In modern markets you cannot afford to miss out on opportunities merely because of incompatible or slow technologies. Banks need to be first to market as often as possible.

The banks themselves are making the change to the “just in time” mentality and that should mean adopting an holistic approach to messaging. To do otherwise would be to risk facing additional costs when offered opportunities. If they do not adopt XML-style systems then every opportunity becomes a potential bugbear as it entails writing a bespoke system at substantial cost in terms of time and resources.

Although, every system has to have a different adaptor, these can now be produced for an existing system in literally days. Producing the original system takes three to five months and banks do not have to ditch their existing systems, as XML is based on a solid business engine and is non-intrusive. Even more importantly it is highly affordable. It makes sense for software houses to operate in this way and to deliver XML solutions to time and budget as customers have the ultimate sanction of simply taking their business elsewhere.

People are changing the way they are thinking. The Internet has already fundamentally changed the way we think about our business. The banking industry has made a shift to electronic trading. We can all agree that the Internet part of the equation has arrived. Banks now have to figure out how they make better use of the opportunities it presents.