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| Buy-side dealer: In illiquid markets trade indications are of great interest |
The launch of an innovative new service for brokers to communicate indications of interest (IOIs) and trade advertisements to dealers at buy-side firms brings new competition that may benefit investors searching for liquidity in the securities markets.
IOIs in buying or selling a security – which contrast with firm price quotes in specified sizes – are increasingly important. In Europe they are a useful tool for fund managers under regulatory pressure to prove that they are seeking best execution.
In the US, the growth of programme trading strategies has added even more significance to IOIs. “The fragmented nature of the US marketplace has combined with the increased use of electronic trading strategies to dramatically reduce average trade sizes,” says Miranda Mizen, senior analyst at TowerGroup’s securities and capital markets practice. “Liquidity is increasingly hidden behind electronic trading functionality so IOIs are an important tool.”
Bloomberg users tend to make use of the IOI service provided on their terminals and AutEx, a Thomson Financial company, enjoys a near-monopoly among non-Bloomberg users. It handles close to a million indications a day for over 300 brokers and 500 fund managers worldwide.
By contrast, Fix City, which launched ioinet on October 14, so far has about a dozen customers and only operates in London. It has, however, attracted the interest of some of the biggest buy-side and sell-side players and is in discussions with potential partners in New York to expand its service beyond London.
“ioinet is a revolutionary new way of distributing pre-trade information to buy-side dealers,” says Karl Breeze, Fix City’s technical director. “It allows the sell side to send IOIs and trade advertisements via Fix to a central hub,” he says. “The messages can be targeted to specific institutions and the buy side can view the information from our website with no need to download or install any software.” The service charges a monthly fee and a fee based on the number of destinations to which messages are sent. Its fees are reckoned to be much lower than AutEx’s.
Fix City has just completed a two-month pilot programme with leading investors and securities firms. These include Barclays Global Investors, Credit Suisse Asset Management, Dresdner Kleinwort Wasserstein, Legal & General Investment Management, Goldman Sachs, Merrill Lynch Investment Managers, UBS Global Asset Management, and UBS Investment Bank.
Customers pay up for competition “Fix City has come along with a lightweight service that offers good functionality,” says Andrew Bowley, head of client connectivity and order management at DrKW. “By using existing sell-side Fix infrastructure to send out IOIs and web technology for delivery to the buy side it offers good service at a much lower cost.”
However, ioinet will not save its sell-side customers any money, at least in the short term. “The problem with Fix City is that you don’t actually save a penny until you don’t have a client using Thomson,” says the global head of electronic trading at a top-tier investment bank that has signed up to post its indications of interest on ioinet. “AutEx is in a kind of monopoly situation and its pricing structure is horrendous. Thomson charges on messages sent out, not on messages received, so ioinet is really an extra cost until lots of people start using it or AutEx changes its pricing. We are however prepared to spend that money just to encourage competition,” he says.
AutEx strongly defends its fee structure. “Thirty years of continuous development have made us the largest service in this space and our pricing structure reflects the continuous investment needed to support our global community,” says Jonathan Wilkins, European director of banking and brokerage markets at Thomson Financial. “The reality is we have not been complacent or unresponsive. We are constantly looking at ways to improve the service, talking to customers about what they want and how they want to do it. We have been working in particular on integrating AutEx into the Thomson One framework, on the flexible delivery of IOIs with clients’ own order management systems, and on working with third parties such as Sun Microsystems to help us extend services to second-tier buy-side firms.”
For Thomson and Bloomberg, IOIs are just one service that they provide in addition to others. Bloomberg users stick to its IOI service because they pay a lot in terminal fees for access to the complete range of services that happens to include IOIs. Thomson users have similar reasons for using AutEx and Reuters’ users have no choice but to use AutEx because of a lack of credible competition. Reuters, however, has plans to launch a new and much improved IOI and trade advertising service next year.
Many market participants are backing ioinet now to help encourage price competition on AutEx. Once Reuters wades in, however, ioinet’s existing users might find it hard to justify the additional cost.
