With this in mind, Waters conducted a State of the Trade survey of our 10,000 subscribers, which primarily targeted buy-side participants-roughly 40 percent of our readership. We wanted to hear their thoughts and concerns on these compelling topics in the midst of both an economic crisis and the ongoing paradigm shift in the balance of trading power towards the buy side. The survey was conducted on behalf of New York-based agency brokerage and trading solutions provider Investment Technology Group (ITG).
First, we asked our readers if they see IOIs and advertised trades (ATs) increasing or decreasing in value. An estimated 68 percent of respondents said IOIs will increase in value and 27 percent said ATs will also increase. This jibes with the findings from ITG. "These answers confirm the ongoing challenge in the search for block liquidity as the buy side is still hungry and aggressively looking for solutions to address that challenge," says Stephen Alepa, managing director for ITG. "While the innovation around liquidity tools and pools has been significant, we see a renewed interest in extracting value out of the old IOI."
Waters asked readers if they would like to see some type of actionable IOI become reality and if they thought this was a possibility. An estimated 89 percent see value in Actionable IOIs, but 59 percent did not expect it would become a reality.
Alepa says that he finds this response "very interesting," adding that the concept of the actionable IOI has been discussed for some time. "It falls into the search for liquidity. If you ask the typical buy-side firm, they very much want to see an actionable IOI. They believe if their top brokers can give them merchandise that is real, that is a very good thing. It is another potential source of block liquidity."
Alepa acknowledges that there are many challenges to making this a reality. "The desire for anonymity, indication firmness, and an integrated workflow are three issues the next generation of the IOI faces." he says. "Is the sell side willing to support a model that provides the buy side anonymity? How will the brokers ensure that their indication is real and truly actionable while sharing it with multiple top clients and managing race conditions? These are solvable challenges, but require a new process model and collaboration amongst all parties."
According to Alepa, optimized workflow is mentioned more than any other issue when it comes to IOIs. "IOIs are not new; they have been around forever. But as people reawaken to the potential of the IOI and when they talk about the challenge of the IOI solution, it is about the workflow. It should be integrated with their existing OMS and EMS trading platforms. A disjointed workflow is going to greatly diminish the uptake of any new IOI models."
OUTSIDE FORCES
One issue on this topic has been in the news: What is the US Securities and Exchange Commission's (SEC's) point of view on a truly actionable IOI? "If it is truly actionable-when that advertisement comes across my desk and I can take it at that price-the SEC asked if that should be treated as a quote," says Alepa. "So, there are regulatory issues along with workflow and mechanical issues in the model that the industry needs to evolve to make it work."
Alepa declines to guess what the SEC's decision would be. "If you look at recent announcements and discussions, they are shining a light on a number of things like dark pools, IOIs, and sponsored links. I am not sure if this is an indication that they are stepping up their actions given what has transpired over the last 18 months, but the fact that they are looking into these things matters."
An overwhelming majority of those who took the survey-93.3 percent-responded affirmatively to the question, "Do you see value in IOI/AT comparative analytics, potentially extended to link analytics to prior trading experience with potential counterparties?" No surprise there, says Alepa. "We are talking about what people don't have now. It's about driving more intelligence into the trading process-if I can take an IOI and compare it to historical activity, which is what the advertised trades are, and look at that in terms of whether I have an IOI from a particular party in the past, how often have I traded on it, how often have they been active in that stock, and so on," says Alepa. "By looking at that, it gives me a better sense of knowing where am I best served in terms of getting the order done."
When asked whether they think there is room in their firms' integration and usage of IOIs/ATs, 53.6 percent said, "Yes, we need minimal improvement." The call for "major improvements" clocked in at 33.9 percent.
Don't read too much into the fact that they need minimal improvements, says Alepa. "The salient point is that over 85 percent of the respondents believe that their IOI processes can and should improve. Couple that with the expected increase in IOI value, the good news is that it will be a short jump towards realizing that value for many of the investment managers. Truth be told, the IOI is a simple message type that fits easily into the FIX-based trading flow. As new IOI business models are established, we expect rapid uptake once the integrated workflow is enabled."
AFTER THE TRADE IS MADE
When asked if the need for real-time trade analytics (TCA) to highlight outliers is increasing or decreasing, a solid 61.5 percent voted "increasing" and 28.8 percent said "no change." Alepa says, "What we hear from our traders is, ‘Help me find liquidity, and give me some interactive feedback on my actions.' There is a demand for real-time TCA and further intelligence on how the order is doing."
Likewise, 87.6 percent of respondents said they would like such a service to go beyond identifying outliers to also offer alternatives. "Traders say, ‘I want you to tell me if my orders are doing well or poorly. If I am lagging my benchmark, give me an idea of where I might want to go or how I might change the strategy or parameters on the order. How can I do better?'" says Alepa.
Waters asked if respondents consider trade ticket costs and settlement costs to be an increasingly important issue, i.e., is there a need for a trade ticket aggregation/central clearing solution? The answer was clear-93.5 percent said yes, with 31.2 percent citing transaction cost management as the driver, 14 percent citing client retention and acquisition as the driver, and 48.4 percent citing both cost management and client service as drivers. This surprised Alepa. "The concept of central clearing and trade ticket aggregation has been kicking around for a while now. Although there is a lot of dialogue on this topic, there has been very little action around this," he says. "Not many buy side firms have put in aggregation solutions. The industry's actions to date frankly are inconsistent with these survey results."
Why the slow rate of adoption? Education and focus, says Alepa. "Last year there were some other things going on, right?" he says, referring to the start of the recession. "It's an operational project to implement a clearing solution and needs to be planned for."
When asked who should pay for this aggregation service, the respondents were open minded, as 68 percent said they saw a shared cost model between the buy side and the sell side. "Seeing that the buy side is willing to share some of the costs is enlightening. They say, ‘I recognize that I get most of the benefits here and it is really a gain on my side, so let's not try to push this completely to the brokers,'" Alepa says.
Does this mean the buy side is saying this is an important function and deserves investment on their side? Alepa says he thinks so. "This is how we like to have conversations. We say, ‘If this is really that important to you, you should be willing to pay for it. If it's not, maybe that tells us something as well,'" he says. Referring to another question asked concerning the industry's intent to evaluate and/or implement a central clearing solution in the next 12 months, Alepa notes, "With over 88 percent of the respondents planning some action in the next year, we may be seeing a transition from education to action mode on the trade ticket aggregation issue."
Whether trade ticket aggregation is a priority in this age of slashed IT budgets and a mad rush to strengthen risk management systems and practices remains to be seen. "We are hearing that the operational aspect of trading costs is making its way into the front office and landing on the traders' and, in some cases, the CIOs' desks. The more that happens, the more they have to put this into the decision process from the trading standpoint. These costs are becoming a part of the best execution thought process."
Alepa summarizes, "With the large majority of the survey respondents weighing in favorably on the value of IOIs, real-time TCA, and trade ticket aggregation, these secondary issues are being widely recognized as impactful weapons in the ongoing battle to find liquidity in a fragmented world." -->