Imported from previous forum
the question of how to identify a particular execution as riskless principal has been raised and number of times and i’m not aware that has been satisfactorily addressed. a previous suggestion referenced tag 528 but that’s the capacity of the firm placing the order, not the execution capacity. another use case suggested the last capacity = principal yet there’s a real requirement to distinguish between principal and riskless principal fills on a per excuction basis for the purposes of identifying soft dollar eligbility. is there any reason not to add and additional value to last capacity? e.g. 29=5 riskless principal. thanks.
[ original email was from John Harris - john.harris@bondmart.com ]
Adam,
Why wouldn’t value 3 (“Cross as Principal”) work for this use case? That’s what a riskless principal does…
Best,
John
the question of how to identify a particular execution as riskless principal has been raised and number of times and i’m not aware that has been satisfactorily addressed. a previous suggestion referenced tag 528 but that’s the capacity of the firm placing the order, not the execution capacity. another use case suggested the last capacity = principal yet there’s a real requirement to distinguish between principal and riskless principal fills on a per excuction basis for the purposes of identifying soft dollar eligbility. is there any reason not to add and additional value to last capacity? e.g. 29=5 riskless principal. thanks.
cross as principal suggests to me the crossing of a firm(principal) order with a customer order. riskless principal is with a customer order in had, i send a firm(principal) order to the street and pass on the subsequent exexution to the customer.
Adam,
Why wouldn’t value 3 (“Cross as Principal”) work for this use case? That’s what a riskless principal does…
Best,
Johnthe question of how to identify a particular execution as riskless principal has been raised and number of times and i’m not aware that has been satisfactorily addressed. a previous suggestion referenced tag 528 but that’s the capacity of the firm placing the order, not the execution capacity. another use case suggested the last capacity = principal yet there’s a real requirement to distinguish between principal and riskless principal fills on a per excuction basis for the purposes of identifying soft dollar eligbility. is there any reason not to add and additional value to last capacity? e.g. 29=5 riskless principal. thanks.
[ original email was from John Harris - john.harris@bondmart.com ]
Adam,
We have debated the meaning of the word “cross” in this forum for several years now. I posted a detailed discussion of the term here:
http://www.fixprotocol.org/discuss/read/117fd991
I do not know what the editors who provided us with “Cross as principal” and “Cross as agent” as values for the field LastCapacity <29> had in mind, but I do know that both expressions are consistent with cross trades as executed in ancient times, i.e., when trading floors actually existed with human beings standing upon them.
I understand that you seek to express “riskless principal” as a value for LastCapacity. Respectfully, your definition of the term is incorrect.
When a firm acts as riskless principal, it simultaneously executes - as principal - a purchase from one party and sale to another. If we call the former Party A and the latter Party B, the riskless principal purchases for its own account from A at the same time it sells from its own account to B. In order for that to occur, it must hold firm orders from A and B simultaneously. The riskless principal never assumes the risk of a price change between the moment of purchase and the moment of sale because there is never a time lag between the moment of purchase and the moment of sale. The only risk that the riskless principal assumes is that of settlement default due the the failure of A or B to fulfill its side of the bargain.
You will note that in my discussion of cross transaction I state that the firm that brings the crossing orders together acts “in the capacity of broker or riskless principal and…impartially establishes the actual execution price.”
So, if a firm is looking for a way to express in an execution report that it acted as riskless principal, “cross as principal” should suffice, particularly if accompanied by an explanation in the implementation specification or otherwise under negotiated rules of engagement. This might only be problematic if you are looking to be more expressive about the means of price discovery, but I won’t belabor that point unless you tell me it is necessary.
Best,
John
cross as principal suggests to me the crossing of a firm(principal) order with a customer order. riskless principal is with a customer order in had, i send a firm(principal) order to the street and pass on the subsequent exexution to the customer.
Adam,
Why wouldn’t value 3 (“Cross as Principal”) work for this use case? That’s what a riskless principal does…
Best,
Johnthe question of how to identify a particular execution as riskless principal has been raised and number of times and i’m not aware that has been satisfactorily addressed. a previous suggestion referenced tag 528 but that’s the capacity of the firm placing the order, not the execution capacity. another use case suggested the last capacity = principal yet there’s a real requirement to distinguish between principal and riskless principal fills on a per excuction basis for the purposes of identifying soft dollar eligbility. is there any reason not to add and additional value to last capacity? e.g. 29=5 riskless principal. thanks.