Buyside Signs Up For IPO Automation

Shanny Basar

Some of the largest asset managers have signed up for Dealogic Connect, which automates the process for equity offerings, as the UK regulator has pushed for the adoption of technology in primary markets.

FIX Trading Community, the non-profit body that develops and promotes the FIX family of standards, started discussions  on automating initial public offerings in UK in 2014 to reduce inefficiency and risk.

Samuel Spilfogel, head of product incubation at data provider Dealogic, told Markets Media: “In Europe we have been holding roadshows for the buyside and half a dozen of the largest asset managers have signed up as early adopters.”

Despite advances in technology the new issue process in the equity market in Europe is still manual, with buyside firms sending separate applications for IPO allocations to each lead bank in the syndicate. These manual orders are the largest trade sizes so there is an increased risk if they are miscommunicated, and as an IPO offer period can run for several weeks an investor may be unaware of a commitment/exposure to a wrongly placed or received order for some time.

Spilfogel added: “We first developed the platform for IPOs, as guided by the FIX committee, but the platform is also functional for fully marketed follow-ons. By the end of this year the platform will be ready for accelerated bookbuilds.”

Successful end-to-end tests of Dealogic Connect, from an investor entering an order to receiving an allocation, took place in both April and June.

In February last year the FIX Trading Community released a best practices document for the automation of IPOs. The paper recommended creating a straight through process to electronically send new issue orders using the FIX Protocol from an asset manager’s Order Management System to the new issue deal managers. The buyside should then receive electronic confirmation of their allocation using the FIX-based integration that asset managers already have in place with their banks.

Dealogic Connect allows asset managers to enter orders either via a web interface or their trading systems using FIX messaging, which Spilfogel said most firms prefer.

“The benefit from the asset manager’s perspective is not only greater clarity and efficiency but this will also provide the added value of a fully audited, time-stamped order generation process that has already cleared an asset manager’s pre-trade compliance checks to ensure no breach of mandate or risk control before it could be sent to the deal manager,” said the white paper.

The buyside companies supporting the initiative include American Century, AXA IM, Baring Asset Management, Capital Group, Fidelity Worldwide Investment, J.P.Morgan Asset Management and Newton according to the white paper.

“The technology is scalable for deals of any size and for hundreds of asset managers,” said Spilfogel.

The platform is ready to be used for a live deal, but the UK vote to leave the European Union on June 23 has affected the deal calendar.

Spilfogel added: “Brexit has meant the new issuance calendar is currently on hold, but Connect is ready to go and will launch as soon as market conditions permit.”

In April the UK Financial Conduct Authority released an interim report on its study of investment and corporate banking which questioned why technology was not more used in primary deals.

The FCA said that while a number of equity and debt transactions have been completed using internet platforms (including the IPO of Google in 2004), it was not aware of recent primary market transactions where issuers and investors were matched through a platform, without the intermediation of investment banks.

The regulator noted a number of firms attempting to disintermediate banks in primary market services, including Secondmarket and Origin.

Secondmarket was acquired by Nasdaq, the US exchange, last year and facilitates the execution of primary and secondary transactions on behalf of private companies and funds. “Given the trend of US-based technology companies tending to remain private for longer, a number of firms have emerged offering early-stage investors and staff a venue to sell their equity to other investors,” added the FCA.

The report also noted the potential of distributed ledger based solutions. The FCA said: “Recently, Finclusion Systems, a London-based start-up developed a platform to allow HEAL –a non-profit organisation backed by Microsoft, Intel, UC San Francisco and others – to issue up to $10bn bonds to fund research into HIV.”

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