Driving IPOs

Adam Conn, Head of Dealing, Baring Asset Management looks at the FIX Trading Community’s IPO Automation Project

Adam ConnAt the 2014 FIX Trading Community conference at Old Billingsgate in London, Michele Patron of Alliance Bernstein and I spoke on a panel to discuss initiatives such as the standardisation of Execution Venue codes and the use of FIX in electronic trading of Fixed Income.

We were there in our roles as two of the three co-chairs of the EMEA Investment Management Working Group, along with Paul Squires of AXA Investment Managers.

We also set out our vision of a world where we as traders could create an STP Process for the electronic transmission of new issue orders from an asset manager’s Order Management System through to the Deal Managers and receipt of allocations back to it.

The primary driver behind such a process would be mitigation of risk by digitising a manual process. Current market practice is for applications (orders) for new issues such as IPOs to be placed manually. The idea is to try and eliminate the risk of error in the transmission or the possible misinterpretation by the receiver of these placed orders by trying to replicate the electronic order placing process in the secondary market.

Automation would also address other problems with the status quo, namely speed, reliability and the integration of this workflow into wider systems: part of the on-going trend of ‘Straight Through Processing’ from front to back. It would essentially upgrade the existing methodology whereby some of the largest single orders an asset manager may give are manually placed with each manager in a book-building syndicate. The electronic communication of new issue applications and receipt back of allocations (quantity filled/executed) seems a natural extension of the existing integration between the Buy-Side OMS and Broker.

At that conference I met with Scott Atwell of American Century, who had discussed a similar aspiration with other members of the US Buy-Side group. After discussion within FIX Trading Community, a Global Buy-Side Working party was established to devise a set of best practice guidelines that would work for both Buy and Sell-Sides.

The multinational approach arising from the global nature of the working group has allowed us to draw on each other’s experiences in different jurisdictions and create a process that should fit regional nuances. The advantage of doing this through the framework of the FIX Trading Community is its neutrality, allowing us to engage with a variety of enterprises to create this new process mindful of the need to standardise disparate processes between markets, participants and systems.

To facilitate this workflow, many factors have been identified for consideration, starting with the need to ensure official stock identifiers are available well in advance of the closing date of an offer. It is crucial that these standard identifiers are used by all parties. The London Stock Exchange has been very supportive, working with us to ensure that global SEDOL codes may, subject to the permission of the Lead Deal Manager, be released when a deal is made public. We have also had similar positive conversations with CUSIP, which also releases its symbology in good time and Bloomberg, as a leading data provider, which confirmed that when this data is released it is immediately made available to its users.

The focus has been on equity IPOs given there is a more significant time period between when an application is made and the deal potentially closing, but the intention is that this process will equally lend itself to Fixed Income new issues, provided ISIN stock identifiers are made available. The move towards single access to all fixed income electronic platforms and the innovative changes we are starting to see in book building should both benefit from the move towards greater automation in order generation and receipt of allocations.

Whilst the FIX Trading Community remains strictly vendor neutral, there have been some detailed conversations to understand the proposed workflow with the leading providers of Book-Build software to the Brokers, which are looking to offer their software to the Buy-Side and with other technology and FIX network providers.

There must of course be two ends to a connection and the next stage of the evolutionary cycle will be to work through the feasibility of this project with the Syndication Managers who, in early conversations have expressed support for this initiative.

Finally, we are all aware that paradigms shift and today’s norm may not be the same as tomorrow’s. The Global Buy-Side working group is mindful to progress this initiative in a manner that lends itself to the future of the book building process, in whatever direction that takes. Whilst ensuring there is no impediment to future direction, we believe risk mitigation is a step in the right direction. This is an industry initiative for the industry. Whilst there is no directive pushing this change, we hope our colleagues who want this new world will join us in making this successful.

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