Submitting an order is not an easy task. It becomes handy when some information is known in advance to decide the order details that needs to be submitted. This is where pre-trade messages come in place. They help to retrieve the information about the securities and market conditions. This can help the broker or the trader to make sure if they have sufficient funding or shares to make a purchase.
In most of the scenarios, pre-trade messages are responsibility of a broker. But there could be a case when a broker is not present in the trading. If it is just an individual making a trade, in that case, the responsibility falls on the trader.
In order to accomplish pre-trade messages, a trading system known as FIX is used. This is used to send the messages electronically, thus freeing the traders from any manual information communication. The tag used for pre-allocation information is 78/79/80 repeating group. The underlying account and the share allocation information can be specified via this tag in the order message.
Uses of Pre-Trade Allocations:
- This allows to create a group of accounts to allocate the shares. A single method is used across all the groups. Some of the allocation methods are Available Equity in which the shares are allocated based on ratios derived from each account’s Available Equity.
- This also allows to allocate the shares on account-by-account basis using a predefined calculation such as Ratio, Percentage etc. It is commonly known as Allocation Profiles. So, the shares allocated are based on the rules set by us.
Pre-Trade Allocation consists of the following steps:
- Buyside sends a New Order request message specifying the following values within the repeating group designated by NoAllocs <78>:
- Sub-account mnemonic : One or more AllocAccount <79>.
- Quantity to be allocated to specific sub-account : AllocShares <80>
- Sellside sends Execution Report <8> messages for the “New” and resulting fills.
Using the above steps, if some pre-trade message has to be sent to a user with Account 3241 and quantity of shares as 60 units then the body of FIX message tags will contain 78=1|79=3241|80=60.
FIX Pre-Trade messages are divided into various categories. One of the main category is “Quotation/Negotiation”.
While trading, a bid is placed by various other traders/brokers on the product which has to be traded. The bid mainly contains quantity, price and account details of the order to be traded. So before placing a bid, some of the pre-trade messages are sent/received between the parties involved in trading. This is done to negotiate a price which is in favor of both parties.
The FIX API terminology can be used for Quotation/Negotiation.
- The tag (35=R) indicates a QuoteRequest message.
- The tag (35=S) indicates a quote message issues in response to a QuoteRequest in step 1.