In the days before the internet, the traditional financial market was as fragmented as today’s cryptocurrency scene: Stocks and bonds were bought over the phone, and traders suffered from high commissions, low levels of liquidity, and painstakingly slow order execution.
Today, the way that most cryptocurrency exchanges use application programming interfaces (APIs) means digital asset traders face similar challenges.
APIs and cryptocurrency trading
On professional trading platforms, APIs act as a doorway between different financial entities, connecting traders with brokers and liquidity providers. This makes markets more liquid and efficient, and enables electronic trading as we know it today with automated strategies and rapid-fire algorithms.
APIs have the potential to transform the cryptocurrency industry in much the same way they transformed the broader financial world, but in their present form they act as a barrier to institutional investment in cryptocurrency—and in the worse cases an achilles heel inviting security breaches.
Most cryptocurrency exchanges today opt for REST and WebSocket API architectures.
- REST APIs rely on request-response sequences to communicate between brokers and traders. This style of communicating information can lead to high latency with traffic jams forming on the servers during times of high demand. This makes REST incompatible with full scale institutional-grade trading platforms.
- WebSocket APIs are asynchronous and don’t rely on the request and response paradigm. This allows them to maintain the same performance as the volume of data increases, and makes them a popular option for streaming real-time market data. But while WebSockets are a powerful tool, they can experience security issues when scaled for institutional applications and often need to be combined with REST in a hybrid API that splits market data and order execution between different protocols.
Neither REST or WebSocket APIs are widely used by traditional institutional platforms that require robust and scalable order execution between brokers and traders.
The Financial Information eXchange (FIX) protocol
FIX is a free and open source API standard that has become the language of the global financial markets.
Unlike REST AND WebSocket APIs, FIX was designed specifically for the financial industry. It was originally developed for the equities market in 1992, and then spread from stocks to bonds, foreign exchange, and derivative markets to become a universal global format. Today it is the de facto messaging standard for communicating trade information across all asset classes between brokers, exchanges, mutual funds, investment banks and trading platforms.
Many of the world’s leading financial institutions—including Barclays, CME, Goldman Sachs and J.P. Morgan—are members of the FIX trading community and contribute to its development. This helps ensure that FIX adoption continues to spread and more financial firms are able to enjoy the benefits.
Minimal latency
FIX was designed to support real-time access to rapidly changing financial data. The fastest FIX engines can process up to 100,000 orders per second with minimal latency, allowing exchanges to scale to handle institutional-grade trading needs.
Access to liquidity
FIX delivers deeper pools of liquidity to traders by allowing them to aggregate orders across different exchanges, and get access to bigger and better liquidity providers. This means better quality of execution and lower chances of slippage.
High security
FIX is battle-tested by 25 years of market action and is proven to be one of the most secure ways to trade. The ongoing safety of FIX is supported by the FIX Cybersecurity Working Group which boosts security by researching and publishing guidelines.
Privacy
FIX lets traders running proprietary systems preserve privacy by keeping the details of their strategy completely secret.
Smart order routing (SOR)
FIX allows traders to handle orders using Smart Order Routing. This minimizes liquidity fragmentation by tapping various different trading venues to find the best execution path for an order at any one time, according to market conditions.
Opening the door to institutions
These benefits make FIX a mainstay of traditional institutional-grade trading platforms. But the API has not yet caught on in the cryptocurrency world where it is supported by only a handful of exchanges.
By not using FIX, cryptocurrency exchanges are closing the door on professional traders that need an institutional-grade API to run algorithms and connect with liquidity providers.
eToroX uses FIX to offer the same level of service to institutions as traditional exchanges. This makes it easier for hedge funds, algorithmic traders and institutional players to participate in the cryptocurrency market.
The liquidity that these big players bring will create a stabler market, ultimately supporting the transition from traditional asset classes to crypto-assets.