Imported from previous forum
I would like to resume the discussion of primary vs. secondary market execution for mutual fund orders. In our process model we receive orders from internal and external clients for Equities, Fixed Income and Mutual Funds through various channels. These orders routed and executed through the same system. Execution can be either routing to an electronic exchange directly, placement with a broker or routing of blocked orders to the mutual fund provider in case of subscription and redemption (primary market).
As a mutual funds potentially can be either traded on the secondary market or with the fund provider directly a flag needs to be set by the client when sending the order to us as broker.
Having looked at the specifications the most suitable tag for me seems to be no. 18 (ExecInst). The question is now whether it is possible to define a new value for this tag (i.e. Z=Subscription/Redemption) for future protocol version. We could then start using this in 4.0 to 4.3 already.
[ original email was from Chris Lambert - chris.lambert@emx.co.uk ]
> As a mutual funds potentially can be either traded on the secondary market or with the fund provider directly a flag needs to be set by the client when sending the order to us as broker.
In earlier discussions we were unable to identify any market that trades in (closed-ended) mutual funds.
A Hub or Funds Supermarket that bulks and nets orders from multiple investors and then issues a subscription/redemption order for the balance with the Fund Manager is acting as an intermediary rather than as an exchange. (See PartyRole)
> Having looked at the specifications the most suitable tag for me seems to be no. 18 (ExecInst).
If it were needed (see above discussion) the tag to use would probably be no. 100 (ExDestination) "Execution destination as defined by institution when order is entered" - the specific exchange being identified by a MIC from Appendix C.
If it were needed a new value could be requested from the MIC Reg Authority to indicate "Deal directly with Issuer" - to prevent routing to an exchange.
However the question remains - "Are there exchanges that support trades in closed-ended Mutual Funds ?"
[ original email was from Chris Lambert - chris.lambert@emx.co.uk ]
Aplogies for the TYPO in my previous post:
> In earlier discussions we were unable to identify any market that trades in (OPEN-ENDED) mutual funds.
> However the question remains - "Are there exchanges that support trades in OPEN-ENDED Mutual Funds ?"
There clearly are many exchanges that support trade in closed-ended funds!
[ original email was from Dwight Arthur - darthur@dtcc.com ]
I agree with CXhris’ response but would like to reword it a little for clarity to those who may not have closely followed this issue to this point.
First, we need to clearly distinguish between two similarly-named yet entirely different issues: open-ended/closed-ended funds versus open/closed funds.
Open-ended funds are funds in which the fund company is accepting subscription and redemption orders. For a subscription order, the fund company or its agent will issue new (additional) shares in the fund upon receipt of the investor’s payment, priced at the Net Asset Value (NAV) as determined from time to time by the fund company. For a redemption order, the fund will receive previously-issued shares from the investor, return them to unissued status, and remit payment to the investor for the value of the shares based on the NAV as determined from time to time.
For closed-end funds, the total number of shares outstanding is fixed and subscription/redemption orders are not accepted by the fund company. The shares trade on one or more open markets, with an investor free to sell shares to any other investor at any price so long as the trade complies with all relevant rules of the particular market, including where relevant the participation of an authorized market maker in the deal.
We have noted that there are cases in which a fund begins as open-ended until some target number of shares have been issues, and then becomes closed-ended.
By way of contrast, open and closed funds are both open-ended. The open fund operates as an open-ended fund described above. In a closed fund, the fund company has determined that the number of shared issued and outstanding is at or near the maximum amount desirable and stops accepting new subscription orders. (Exceptions may be made for new shares issued through dividend reinvestment, subscription orders received tp add shares to an existing investment, or subscription orders for a new participant in a group that holds existing shares such as a new employee in an employee-sponsored retirement plan.) Redemption orders, however, are accepted by the fund company and investors do not sell shares to each other on the open market.
Our finding has been that a fund is either open-ended or closed-ended at any one point in time. If it is open-ended, subscription and redemption orders are sent to the fund company or its agents. (For an open-ended fund that it closed, new subscriptions will be rejected). For a closed-ended fund, orders to buy or sell shares are sent to the open markets or market makers on which these shares are traded.
(Note, up to this point I am only reporting what we find to be industry practice, and now I will turn to what FIX/CIV protocol does about it.)
We believe that the CIV protocol within FIX applies to open-ended funds. We believe that closed-ended funds are traded as equities, and that no enhancements or extensions to FIX equity protocols are needed to cater for closed-ended funds. Finally, we believe that the question of whether a fund is open-ended or closed-ended is NOT a part of the information to be submitted on an order. Rather, it is determined by the fund company and becomes a part of the static data defining the particular securities instrument.
In writing this explanation, I find that we may be missing a corporate action message to announce that an open-ended fund will be converted to closed-ended or vice versa as of some specified point in time.
Josef Fehr of UBS Warburg describes a need to designate whether an order is to be sent to either the primary market (fund company) or secondary market (exchange). I believe that this makes sense only in the case that there is a single instrument, designated by a single ISIN (or equivalent designation) which, at a single point in time, is simultaneously trading as open-ended (subscriptions accepted by fund company) and closed-ended (at a market-maker or exchange).
I would be interested to know (a) whether there are or have been instruments that simultaneously trader both ways, as described above, and (b) if not, whether a situation can be described in which this designation on the order cannot be eliminated by reference to static instrument data.
- Dwight
Dwight’s summary provides a good description on the characteristics of the funds business. I also agree with him that closed-ended funds are traded as equities, and that no enhancements or extensions to FIX protocol are required for this. However, talking to our funds trading desk I was told that most of the funds (open-ended) based on Luxembourg regulations are also listed at the Luxembourg stock exchange. Furthermore Brokers publish prices in Reuters for such funds.
As secondary vs. primary market “execution” might also have a different tax impact it is important for us that the client can indicate how the order should be placed.
Looking at the SWIFT ISO 15022 formatting guide for a buy/sell order SWIFT has catered for this requirement by including Subscription and Redemption as additional values (apart from Buy, Sell) to the Buy/Sell indicator. May-be this could also be the direction the FIX protocol wants to move to.
> I agree with CXhris’ response but would like to reword it a little for clarity to those who may not have closely followed this issue to this point.
>
> First, we need to clearly distinguish between two similarly-named yet entirely different issues: open-ended/closed-ended funds versus open/closed funds.
>
> Open-ended funds are funds in which the fund company is accepting subscription and redemption orders. For a subscription order, the fund company or its agent will issue new (additional) shares in the fund upon receipt of the investor’s payment, priced at the Net Asset Value (NAV) as determined from time to time by the fund company. For a redemption order, the fund will receive previously-issued shares from the investor, return them to unissued status, and remit payment to the investor for the value of the shares based on the NAV as determined from time to time.
>
> For closed-end funds, the total number of shares outstanding is fixed and subscription/redemption orders are not accepted by the fund company. The shares trade on one or more open markets, with an investor free to sell shares to any other investor at any price so long as the trade complies with all relevant rules of the particular market, including where relevant the participation of an authorized market maker in the deal.
>
> We have noted that there are cases in which a fund begins as open-ended until some target number of shares have been issues, and then becomes closed-ended.
>
> By way of contrast, open and closed funds are both open-ended. The open fund operates as an open-ended fund described above. In a closed fund, the fund company has determined that the number of shared issued and outstanding is at or near the maximum amount desirable and stops accepting new subscription orders. (Exceptions may be made for new shares issued through dividend reinvestment, subscription orders received tp add shares to an existing investment, or subscription orders for a new participant in a group that holds existing shares such as a new employee in an employee-sponsored retirement plan.) Redemption orders, however, are accepted by the fund company and investors do not sell shares to each other on the open market.
>
> Our finding has been that a fund is either open-ended or closed-ended at any one point in time. If it is open-ended, subscription and redemption orders are sent to the fund company or its agents. (For an open-ended fund that it closed, new subscriptions will be rejected). For a closed-ended fund, orders to buy or sell shares are sent to the open markets or market makers on which these shares are traded.
>
> (Note, up to this point I am only reporting what we find to be industry practice, and now I will turn to what FIX/CIV protocol does about it.)
>
> We believe that the CIV protocol within FIX applies to open-ended funds. We believe that closed-ended funds are traded as equities, and that no enhancements or extensions to FIX equity protocols are needed to cater for closed-ended funds. Finally, we believe that the question of whether a fund is open-ended or closed-ended is NOT a part of the information to be submitted on an order. Rather, it is determined by the fund company and becomes a part of the static data defining the particular securities instrument.
>
> In writing this explanation, I find that we may be missing a corporate action message to announce that an open-ended fund will be converted to closed-ended or vice versa as of some specified point in time.
>
> Josef Fehr of UBS Warburg describes a need to designate whether an order is to be sent to either the primary market (fund company) or secondary market (exchange). I believe that this makes sense only in the case that there is a single instrument, designated by a single ISIN (or equivalent designation) which, at a single point in time, is simultaneously trading as open-ended (subscriptions accepted by fund company) and closed-ended (at a market-maker or exchange).
>
> I would be interested to know (a) whether there are or have been instruments that simultaneously trader both ways, as described above, and (b) if not, whether a situation can be described in which this designation on the order cannot be eliminated by reference to static instrument data.
>
> - Dwight
>
Regarding:
- "also listed at the Luxembourg stock exchange"
- "As secondary vs. primary market execution"
- "important for us that the client can indicate how the order should be placed"
It seems to me that the following existing FIX features might be considered:
- ExDestination (used on the Order to designate the market/exchange to execute the order)
- LastMkt (used on the Execution Rpt to specify the market/exchange where this specific execution took place)
An alternative solution could be using TAG 40 (OrdType) which logically would even make more sense.
The values could be extended to something like Josef’s Z=Subscription/Redemption.
Or perhaps Tag 54, Side, where 10 = Subscribe and 11 = Redeem, or if you require this field to be only one character in length, you could use D and E as valid values.
Dwight’s comments from previous postings are still valid, however it is often the case that a client entering an order prefers to clearly state ‘subscribe’ or ‘redeem’ due to the tax impact and for clarity in the back-office. This would also be helpful for clients mapping FIX into a GUI application.
Does this require a ‘CIV recommendation’ to clearly state how FIX addresses subscribe and redeem?
Regards
John
> An alternative solution could be using TAG 40 (OrdType) which logically would even make more sense.
>
> The values could be extended to something like Josef’s Z=Subscription/Redemption.
>
>