Tackling the Block in the IOI Landscape
By Robert Warshaw
The value of Indicators of Interest (IOIs) is being questioned and the growth of new distribution mechanisms has actually heightened the concerns with several key problems remaining for the industry, contends Tradeweb’s Robert Warshaw.
Dealers are not getting the return from IOIs that they would like. Buy-side firms are becoming more reluctant to interact directly with IOIs because they do not necessarily represent block capacity and there is immediate information leakage. So, while they remain important as guideposts for order management, IOIs are losing their power to drive trades.
The distribution of IOIs is also evolving with a significant increase in direct distribution from specific trading venues – Alternative Trading Systems (ATSs) and algorithms. Regardless of the nature of the distribution, the question is whether block-sized IOIs can increase the likelihood of creating a satisfactory trading experience for both sides.
The biggest problems with the current model are:
A) Uncertain rules of engagement.
Dealers offer IOIs as an invitation to trade while buy-side firms want IOIs to be a promise that a trade will occur if they expose their order. Because there is uncertainty around broker intent, buy-side firms are using IOIs for information purposes but with less willingness to accept the invitation to trade.
B) Unreliable targeting of messages.
Buy-side firms only want to see relevant IOIs on which they can execute. Because dealers cannot know all order flow, too often the buy-side gets buried in irrelevant messages or misses out because the broker has assumed they are not interested in a symbol. This hurts the broker and client.
C) Difficulties in evaluating IOIs.
Even with some of the new representations of IOIs that are appearing on buy-side desks, it is very difficult to determine the comparative merit of one IOI versus another, and to the market.
D) Information leakage.
Many clients are reluctant to react directly to an IOI because it means showing their hand to the dealer without certainty of response. Good IOIs help set the parameters of a good negotiation. Bad IOIs act as fishhooks to reel in a customer with less welcome consequences. Distinguishing between the two is not always easy.
E) Market fragmentation.
IOIs can come from distributors, direct from dealers or through dark, really grey, pools. Some are integrated into Order Management Systems (OMSs) while others are not. They can be in the form of traditional IOIs viewed through third party displays, FIX IOIs integrated into OMSs, EMSs, IM messages etc. The complexity and fragmentation have increased the difficulty of determining contextual relevance.
Unresolved, these problems will increase the trend that IOIs influence but do not drive order activities.