IOIs Evolve As Buy-side Demands Greater Specificity
Capital Group’s Christopher George lays out the case for improved IOIs and the technology upgrades required.
Indicators of Interest (IOIs), a staple on buy-side trading desks, are due for an upgrade. Across buy-side trading desks, the IOIs traders interact with, either through Bloomberg or older OMS systems, were not meeting traders’ needs. Our head trader and a few of lead traders from multiple regions met to figure out what made the current IOIs less desirable and what we could do systematically and procedurally to make them more useful: in other words, to actually provide clear indications of interest.
The FIX Protocol currently allows for some generalisations or ambiguity. For examples, small, medium and large size labels without a definitive price were not particularly useful to buy-side traders. At a minimum they were noise. At their worst, they were outright fishing. We constructed some in-house rules of engagement, outlining the messaging requirements that would allow IOIs to be shown in our OMS, thereby dictating which IOIs could be viewed and acted upon by Capital Group traders.
Our goal was to make this as seamless and as painless as possible, leveraging the FIX Protocol’s standard tags and the existing Bloomberg IOI specification for sell-side firms. Essentially, we required pieces of information the FIX Protocol deemed optional, and more rigidly defined them. In particular, we drew up very stringent rules around categorising whether IOIs are a true natural, a principal-natural hybrid or a true principal IOI offering. We also set fairly rigid rules around pricing to support tagged or limit-priced IOIs.
Lastly, we wanted the sell-side to provide as much colour as possible, so within our rules of engagement, there are ways the sell-side could indicate the IOI’s origin, the desk or type of transaction we are handling as well as pre-formed comments. We encourage sell-side brokers across the globe not only to meet the minimum standard outlined, but to provide us as much rich detail as they can because the more information they can provide to buy-side traders, the more likely traders are to engage.
Our trading partners around the world support and understand the broader buy-side’s need for greater transparency and accuracy around IOIs. While most are enthusiastic about working with us to tailor the flow coming to our traders, other firms are concerned about being left behind in terms of exploring this as an opportunity to engage. The firms we reached out to or at least conversed with have all seen the need and been willing to partner with us.
The response depends on the amount of transactions they want to expose to us. Based upon our definitions of the type of flow, some firms send IOIs for anything they can. Others are only willing to send indications of interest for pure natural orders. The engagement is cautious but the sell-side understands the need and that is most important.
The main impediment we have encountered is technological. In a lot of cases these firms adapt their EMS, OMS and IOI systems to adopt a different set of business rules. Willingness, however, does not remove technology and budgetary constraints, which has made some roll-outs more lengthy than others.
Initially this was something Capital Group was driving for our needs, as well as to leverage other firms to clean up the IOI messaging flow and make it a more meaningful tool on “the street”. The FIX Protocol IOI sub-group is spinning up, and as a member, we espouse a philosophy of IOIs and improved IOI transparency among the sell-side and more broadly among our peers. Better IOI transparency can only improve trading opportunities and streamline the location and execution of block trades.
This is truly a global effort for the buy-side. It is more mature in North America, but we are beginning to implement it both in Asia and Europe. Some sell-side firms may follow our suggestions in North America but legacy systems in other regions and the regulatory constraints around markets make it a little more challenging.
Capital Group built our IOI systems in-house, but we engaged other sell-side partners. We are beholden to whatever technology solutions they offer, and depending on the size of the firm and the technology choices they made, in some cases they have direct control over their platforms. In other cases we must engage with vendors.
In addition to the brokers who help us flesh out this approach, we work directly with NYFIX, Fidessa, various EMS providers and a few others groups in the middle to get all the hoops connected together that they need to get this to work right too. It has been rather a daunting, challenging road that we only recently walked down from end to end.
When dealing with brokers that have a third party relationship with their platform providers, it becomes a game of telephone. Buy-side traders are actively involved with the sell-side in this approach, and I am actively engaged in dealing with the business and the technology provider on the other side. The sell-side then funnels our rules of engagement to their third party providers, who then interpret and implement what they received. Simply meeting a timeline has been a challenge. Like any other IT businesses, these vendors are spread thin and have multiple demands, and this is just one of many. But once these third party providers are certified, economies of scale will appear fairly soon and future engagements with the vendors should proceed much quicker.
One step I take in this process is to ensure our trading desks are in conversations with their peers on the sell-side. Before we do anything with a new partner or region, I want to know the traders sitting on our desks in their respective regions are talking to their peers and everybody understands the process and flow. That way, the sell-side talks to their IT partners and makes sure they have the collective understanding and we’re all executing in the same way. All parties involved should have a mutual understanding of the type of IOIs that will be sent, what happens when we respond, and who to work with when questions or issues arise (both business and technical).
From an IT standpoint, we can point to this effort with pride and say this is providing real value to our business partners. On the sell-side I have engaged with, they all seem to be operating in concert.