A pilot to automate initial public offerings in UK and reduce inefficiency and risk is slated for next month after the FIX Trading Community, the non-profit body that develops and promotes the FIX family of standards, started discussions on the process in 2014.

Jody Drulard, chief product officer at data provider Dealogic, said at the FIX EMEA Trading Conference in London last week that a pilot of the IPO automation process with live trades will take place in April.

Drulard added: “The intention is to expand from IPOs in the UK to all equity capital markets products, including accelerated bookbuilds, and then to Europe, Middle East and Africa.”

The process began in 2014 when a group of buy-side firms met to discuss how to make the placing of orders for equity IPOs and fixed income new issues more efficient and transparent.

Adam Conn, head of dealing at Baring Asset Management, said at the FIX conference: “The primary market has not changed in more than 50 years. In Europe in the equity new issue market, buy-side firms still send applications for IPO allocations manually to each lead bank in the syndicate.”

In addition these manual orders are the largest trade sizes and so there is an increased risk if they are miscommunicated. As an equity IPO offer period can run for several weeks an investor may be unaware of its commitment/exposure to a wrongly placed or received order.

In February last year the FIX Trading Community released a best practices document for the automation of the initial public offering process. 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 buy-side should then receive electronic confirmation of their allocation using the FIX-based integration that asset managers already have in place with their banks.

“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 buy-side companies supporting the initiative include American Century, AXA IM, Baring Asset Management, Capital Group, Fidelity Worldwide Investment, J.P.Morgan Asset Management and Newton.

Scott Atwell, manager, FIX trading and connectivity, American Century Investments, said at the conference: “We are a big proponent of automation and new issues is the one area we have not been able to crack.”

The white paper said the industry needed to identify the configuration of a procedure for the electronic transmission of orders for equity IPOs and fixed income new issues similar to the handling of secondary market orders while taking into account that an IPO bookbuilding lasts two weeks, but just one day in fixed income.

Gareth McCartney, head of equity syndicate, EMEA at UBS Investment Bank, said at the conference that automating the new issue process would lead to more efficiency and accuracy, and make it easier for banks to meet their know your customer requirements.

“Automation eliminates book sharing discrepancies,” McCartney added. “We get a unified book and a cleaner indication of demand which the buy-side can engage with.”

Featured image by Bakhtiarzein/Dollar Photo Club