Buy Side Seeks IPO Efficiency03.02.2015
Buy-side companies are exploring how to make the placing of orders for initial public offerings and fixed income new issues more efficient and transparent. By trying to replicate the order placing process in the secondary market and replace the current manual process, the goal is to remove the risk of error in transmission or misinterpretation by the receiver of those placed orders.
“Buy-side firms recognize this as an area that is completely done manually and transmitted over the phone,” said Scott Atwell, manager of FIX trading and connectivity at American Century, which manages $140 billion in assets through mutual funds, institutional separate accounts, commingled trusts and subadvisory accounts. “These could be the largest orders that a trading desk ever places.”
Atwell, who manages American Century’s FIX connectivity to the brokers used for its equity trading worldwide, serves as a director for the FIX Trading Community, the non-profit organization which manages the FIX Protocol, and has also served as co-chairperson of the Global Steering Committee for FIX Trading Community and co-chairperson of the FIX Global Technical Committee, and actively participates in several other FIX committees and working groups.
The FIX Trading Community has published a ‘best practices’ document for the transmission of IPO orders. The objective of this document is to create a practice that would bring the new issue order placing process in line with the same procedure used for secondary market orders and trade fills.
Atwell and his colleagues at other institutions, including AXA IM, Baring Asset Management, Capital Group, Fidelity, and J.P.Morgan Asset Management wanted to create a method for sending a desired IPO quantity, known as an indication, electronically from an order management system to the booking agents for the dealer syndicate, and receive allocations electronically.
“The flow itself from the buy-side perspective is consistent with the flow you would have if you were giving an order to a sales trader at a broker, or even if you were sending an order into an algo,” said Atwell. “It’s just ensuring that the information that goes into the algorithm is the correct information, and that if the algorithm is executing something like pro rata, then that should be the outcome of what comes back on the other side.”
The Best Practices document sets out recommendations to create a straight through process for the electronic transmission of new issue orders using the FIX Protocol through from an asset manager’s order management System to the new issue deal managers and receive allocations from it.
“The FIX Global Buy-side IPO working group is seeking to use automation to mitigate risks associated with the manual placement of new issue applications and receipt of allocations, which may be amongst the largest single orders a firm will place,” said Adam Conn, head of dealing at Baring Asset Management, in a release. “We are mindful of doing so in a manner that lends itself to future evolution of technology in the bookbuilding process in whatever direction that takes.”
The placing of new issue applications is a manual process where the applicant has to repeat the same order to each of the lead managers, which could number five or more. This system is not only inefficient but the process increases risk of error in transmission or misinterpretation by the receiver of those order placements.
For example, if a buy-side trader initially requests an allocation of 300,000 shares from lead manager, and later calls another lead manager and amends the request to 400,000, there’s the risk that the trader will end up with a total of 700,000 shares instead of 400,000. Likewise, if the trader initially requests 300,000 and then requests an additional 100,000, for a total of 400,000, there’s a risk that this will be misinterpreted as changing the request from 300,000 to 100,000.
There is also the risk that the order placed by the applicant gets amended in some way before it reaches the syndicate book. As an equity IPO offer period may run for several weeks there is a material period of time that an investor may be unaware of its commitment/exposure to a wrongly placed or received order.
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