FIX Trading Community Proposes Electronic IPO Process

In a Best Practices document, the FIX Trading Community published a process to automate portions of the IPO process to

Can the IPOs replace much of its manual processes with electronic platforms? That’s what the FIX Trading Community is aiming to accomplish with the publishing today of a Best Practices document for the automation of IPOs. A non-profit group, the FIX Trading Community works on creating financial industry standards for the FIX API messaging protocol. Learning more about the current initiative and what it aims to replace, Forex Magnates spoke with Tim Healy, Global Marketing and Communications Manager for FIX Trading Community.

For the most part, investment banks are employed to act as middle men between companies going public and investors. The result is a relationship-based process that entails banks and the issuing company presenting the value of their sale to buy-side investors who relate their interest in the deal.

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When the buy-side send their orders of interest in an IPO, Healy explained, “it is very manual” and based on phone calls, emails and messaging platforms where information is being passed between the different parties. While this process works, the result is the potential for errors in transmission of information, according to Healy.

Tim Healy, Global Marketing and Communications Manager for FIX Trading Community
Tim Healy, Global Marketing and Communications Manager for FIX Trading Community

To create a solution, the Buy-side Working Group at the FIX Trading Community created a separate IPO subgroup to analyze the process and propose a system using FIX messaging to bring more efficiency to the IPO allocation process. The result is the creation of the current Best Practices document that is backed by the buy-side.

Among the buy-side firms participating in backing the document are American Century, AXA IM, Baring Asset Management, Capital Group, Fidelity Worldwide Investment, J.P.Morgan Asset Management and Newton.

According to Healy, the document “is not by any means the final version of the process,” but it sets up a working protocol which can be used to create dialogue between the buy-side and sell-side to agree on how to implement the electronic process.

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The main function of the Best Practice process is the ability to use the FIX protocol to relay messages so that the buy-side can send orders for the proposed offering to the lead managers electronically.

An example of this is the ability of the buy-side to indicate their level of interest for the offering to the lead managers, such as being willing to buy $1 million of shares at $10/share and $2 million of shares at $9/share. This process is currently manual and there is the potential for errors.

With the electronic system, the buy-side would then be able to efficiently send aggregated demand for the offering from their firm to the investment bank. Electronically, the bank could then notify the buy-side of allocation results and prices. The overall value of the proposed process of using FIX would be expected to reduce the risk of mistakes related to the sale as it reduces manual messaging friction between all parties involved in the offering.

Forex Magnates asked Healy whether he believes such an electronic process is one that would eventually lead the buy-side to create a system that connects IPO issuers directly with them and cut out the need, at least partially, for sell-side investment banks? Healy answered that this document wasn’t addressing any change in the investment banking process but was more focused on the IPO order allocation process. He added, “Investment banks are part of the IPO process and bring advice in selling the offering.”

Looking ahead, while the buy-side backers of this project are primarily aiming to increase efficiency in the current IPO system, as more of the process becomes electronic, it could lead to a more automated marketplace forming.

In such a scenario, prospective issuers would promote themselves to the marketplace’s buy-side audience with minimal sell side involvement. The marketplace could resemble that of existing crowdfunding and P2P lending platforms, with the IPO process resulting in less friction between the IPO companies and buy-side investors.

Download the document here

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