IPO Automation Goes Live
Dealogic Connect, which automates the process for equity offerings, was used for a live deal for the first time last week after some of the largest asset managers signed up for the platform.
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.
The new issue process in the equity market was still manual with buyside sending separate applications for initial public 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.
Dealogic, the financial markets platform company, said in a statement that Connect was used for a live deal for the first time last week.
Investors can use Connect to place an electronic indication of interest for an IPO which is then transmitted to the banks running the IPO, who can review and approve the request and send electronic confirmations back to their clients. 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.
A syndicate of banks released an IPO in the United Kingdom to Connect, and investors were able to enter Indications of Interest of shares, with Fidelity International submitting the first.
Jody Drulard, chief product officer at Dealogic, said in a statement: “Because Connect takes advantage of existing technology and operational practices at buyside firms and is embedded into the Dealogic network at sellside firms, it is an incredibly attractive option.”
In February last year the FIX Trading Community released a best practices document for the automation of IPOs.
“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.
Tim Healy, global marketing & communications director at FIX, said in an email: “We are delighted that this initiative first discussed by the FIX Global Buy-Side Committee in March 2014 has come to fruition. The mitigation of risk by digitising a manual process can only be a positive and leveraging off the FIX Protocol makes the implementation significantly easier for market participants.”
Samuel Spilfogel, head of product incubation at Dealogic, told Markets Media in August that the firm had been holding roadshows in Europe for the buyside and half a dozen of the largest asset managers had signed up as early adopters. Dealogic plans to roll out Connect from Europe to other geographies by the middle of next year.
Connect can also be used for other equity offerings such as fully marketed follow-ons and accelerated book builds and will support convertible bonds next year.
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 it wanted to understand why technology has not been adopted in primary market activities in the same way as in other parts of banking. For example, the report said more than 30 electronic platforms have launched for secondary bond trading.
“Where there are regulatory barriers that prevent the adoption of technological solutions, we are keen to consider them in the context of the market study,” added the FCA.
More on IPO automation:
Standard Chartered became the first commercial issuer of SDR bonds in China.
The first client-cleared trades were included in a compression cycle this month.
Non-bank institutions will increasingly become providers of market liquidity.
Asia Pacific said liquidity has improved in recent years