FIX Trading Community has successfully tested a new process to automate initial public offerings as the UK regulator reviews technological innovation in primary market services.
The non-profit body that develops and promotes the FIX family of standards, recently held a town hall to update market participants on a global initiative to digitize new issues – including submitting orders and receiving allocations – to decrease risks in the currently manual process. These manual orders are the largest trade sizes so there is an increased risk if they are miscommunicated. In addition, 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.
Members of the FIX Trading community include asset managers, asset owners, sellside firms and vendors and 78 were registered attendees at the town hall, which FIX said was an indication of the strong interest in creating a process for both fixed income and equity new issues.
The town hall heard there had been a successful test of the new process which allows straight-through processing of an IPO for the first time. The test including sending an order to apply for an equity IPO directly from a buy-side order management system to the syndicate desk of a sellside firm. The allocation of shares was then successfully sent directly back to the fund manager’s OMS.
Maria Netley, co-chair of the FIX Trading Community EMEA governance board, said in a statement: “The IPO initiative is progressing thanks to a concerted effort by market participants and vendors to work together. Through this collaborative effort and others, the FIX Trading Community is addressing the real business needs affecting the market.”
Discussions on the FIX IPO automation process were launched 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.
However this week the Financial Conduct Authority, the UK regulator, said that it wants 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.
The UK regulator released an interim report this week on its study of the investment and corporate banking market which included a review of the IPO process. The report said that responses to the FCA did not contain many references to technological innovations in primary markets.
One innovation was electronic bookbuilding which was mentioned by three banks and advisers. “Some issuers noted that during an issuance they had access to a tablet application that allowed them to follow the bookbuilding process in real-time. They were satisfied with the transparency that this allowed,” added the report.
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.
Origin is a London-based start-up building an online marketplace for wholesale borrowing and lending that ”directly connect[s] borrowers and lenders in the corporate bond market” and has received support from the FCA’s Innovation Hub.
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.”
The FCA added that crowdfunding is also likely to affect the way in which companies raise capital although platforms are currently only used by small enterprises and start-ups with a strong retail footprint. “However, we note that some advisers focused on the small and micro-cap sector have begun advising clients on how to utilise crowdfunding platforms to raise capital,” added the report.
Featured image by Sikov/Dollar Photo Club