The FIX Trading Community, the keeper of the groundbreaking Financial Information eXchange (FIX) protocol for electronic trading, is widening the reach of the language via a best practices document intended to help firms automate the initial public offering (IPO) process.
The FIX group reports that buy-side firms made it known via the FIX Global Buy-Side IPO working group last year that they want more transparent and efficient ways of placing orders for equity IPOs and for fixed income transactions. Asset managers wanted “a fully audited, time-stamped order generation process” that would clear pre-trade compliance checks.
“By trying to replicate the order placing process in the secondary market and replace the current manual process, the goal was to remove the risk of error in transmission or misinterpretation by the receiver of those placed orders,” according to the FIX Trading Community in a statement.
The Best Practices document offers recommendations to create straight through processing for the electronic transmission of new issue orders using FIX via an asset manager’s order management system and all the way to the allocation process and the start of the settlement effort.
The IPO effort has gotten the support of American Century, AXA IM, Baring Asset Management, Capital Group, Fidelity Worldwide Investment, J.P. Morgan Asset Management and Newton, according to FIX Trading Community officials.
“At present, the placing of new issue applications is a manual process where the applicant has to repeat the same order to each of the lead managers which could be five or more,” according to the executive summary of the report, “Global Buy-Side Working Group IPO Recommended Practice/Guidelines.”
The authors of the report argue that this system is inefficient and increases the risk of error in the transmission or misinterpretation of those order placements. “There is also the risk that the order placed by the applicant gets amended in some way before it reaches the syndicate book,” the report says. “As an equity IPO offer period may run for several weeks there is a material period of time that an Investor may be unaware of its commitment/exposure to a wrongly placed or received order.”
Given the history of FIX, the IPO initiative focuses on pre-trade and front-office trading issues. However, the best practices guidelines extend to post-grade processes.
For the buy side, FIX can be used to send post-trade block allocation breakdowns to the sell side in a point-to-point transaction (the report even offers a helpful diagram). Buy-side firms can also apply FIX to initiate the settlement process. At the same time, sell-side firms can mirror the use FIX to receive the buy-side client’s post-trade account-level breakdowns and to initiate settlement.
FIX can also play the same allocation and settlement initiation roles for transactions created via multi-broker, deal hubs, according to the report. The goal would be to promote more straight through processing efficiency and provide greater transparency via the already well-established protocol.
I asked a FIX Trading Community representative about the middle- and back-office uses of the FIX protocol for the IPO process and heard back from a longtime advocate of the protocol, Scott Atwell, manager FIX trading and connectivity at American Century.
For the press release about the IPO best practices, Atwell says that leveraging FIX to electronically communicate IPO order-related information is “a natural extension” of the FIX-based integration that buy-side order management systems use to connect to sell-side brokers. But FIX has already extended its reach beyond OMS links.
“Firms like mine (American Century) have been sending our (post-trade) allocation breakdowns (of the portfolio/accounts and appropriated share quantity) via FIX allocation messages to the booking and billing agent for some time,” Atwell says, in an emailed message. “If other firms have not automated the post-trade communication of allocations to the broker, following the IPO, then they certainly might use this as an opportunity to improve end-to-end automation.”
As an IPO is the mother of all corporate actions, I felt I should ask whether FIX would ever have a role to play in the very complex world of corporate actions processing.
“The IPO recommended practices document does not directly address, or change, corporate action processing,” Atwell says. “The working group’s focus has been on reducing risk and improving efficiency in terms of a buy-side firm’s expression of interest/participation in an upcoming IPO. We are not focused on the initial setup of the offering itself (a process which takes places months prior to the deal being ‘priced’/executed). That being said, FIX does have some messaging related to specific facets of corporate action processing.”
So, there may be an expanded role for FIX in corporate actions processing in the future. In the meantime, the report for FIX’s new role in the IPO process can be accessed at: http://bit.ly/1DPvChI.
Need a Reprint?
Leave a Reply