DWS has launched Financial Information eXchange (FIX) connectivity for its authorised participant (AP) portal to help streamline the ETF creation-redemption process, ETF Stream can reveal.
FIX connectivity will allow a direct connection between ETF issuers and APs’ order management systems, reducing operational risks and offering front-to-back automation across primary and secondary markets.
Having been available in the US for several years, the launch is one of the first-of-its-kind in Europe and DWS argued the technology will represent a “major leap” in ETF market efficiency by driving sharper pricing and “risk reduction across the value chain”.
Should multiple ETF issuers adopt FIX, APs will not be required to log into every issuer portal to place an order. Instead, FIX will offer “duplicate functionality to the primary market”.
According to DWS, primary market order volume has increased by approximately 40% over the past five years, leading to strong demand from APs for solutions such as FIX.
The group said it expects “the majority of primary market orders” to be placed via FIX in the future.
Graham Southwell (pictured), senior capital markets specialist at DWS, said: “[There has been] strong demand from the AP community to develop a form of direct connectivity to issuers.
“With FIX representing market standard in the secondary market, its lean structure, predefined fields and customisability made it a natural choice when opting to invest.”
Uptake in FIX in Europe has so far been slow with challenges around creating a bespoke European FIX for UCITS products, which requires “significant” investment, according to DWS.
Europe’s often complex share class structure means smaller-sized orders – such as conversion orders between share classes – can often be cumbersome when inputted manually.
FIX development means these types of orders will be automated, improving market timing and efficiency, the group said.
“Relative to the 40act, UCITS platforms are highly complex with share class structures, different replication types, ETFs, ETCs and several different options for order placement,” Southwell said.
“While FIX has been available for a number of years on US platforms, adoption and development in Europe has been slower, requiring a significant investment to launch the protocol for UCITS.”
Since 2020, there has been a reduction in the average size of conversion orders by over 60% while the number of share class conversion orders have increased by 200%.
Furthermore, conversion orders account for more than 70% of primary market flow, “highlighting the ever-increasing requirement for automation of administrative orders”, Southwell added.
The German asset manager added there is a positive correlation between a benchmarks’ underlying transaction costs and the volume of share class conversions.
For example, a Euro Stoxx 50 ETF will have a greater number of conversions than lower-cost S&P 500 products, meaning trading costs can be compressed using FIX.
Southwell added: “While adoption of new technology takes time to ramp up and noting it is important to maintain all routes to the primary market to ensure obstacle free accessibility, DWS expects the majority of primary market orders to be placed via FIX in the future.”