Head traders team up against IOI misuse

A group of 20 buy-side head traders have been canvassing peers at Asia-focused asset managers to rate indications of interest (IOIs) sent out by brokers.

The group wants to discover whether they receive orders in full on the back of an IOI, in partial amounts or not at all. Through this they hope to rate brokers and discourage misuse of IOIs, which they claim is counterproductive to their search for liquidity.

Distributed via third-party terminals, IOIs are pre-trade messages containing information such as the size of a buy or sell order and the stock price often based on benchmarks or price limits set by clients. They are used in privately negotiated deals matched off an exchange’s order book.

As average daily value traded across Asia-Pacific is down 25% year-on-year in 2012, buy-sides are asking brokers for clarity. They say IOIs are often misused as a tool to draw more business from investors, with some brokers using them to fish for market interest without back-up flow.

“Buy-sides want IOIs that are accurate, with usable information they can rely on. We’re not interested in calling a broker on an IOI only to be turned away because it’s not real or workable,” says Kent Rossiter,  head of Asia-Pacific trading at Allianz Global Investors’ RCM unit.

The group’s move underlines the dissatisfaction at IOIs that are not “natural orders” from a broker’s buy-side client. They can be from a bank’s book backed by its own facilitation desk, for example, which traders don’t like due to competition risk in the event of unfilled orders. 

Emma Quinn, head of Asia-Pacific trading at AllianceBernstein, says buy-side traders want the broking community to be clear about clients they act for and what order flow is behind IOIs. “If it’s a principal order, they should mark it as such,” she says. Similarly if the order is indicative.

The group of 20 buy-side traders plans to present the findings of their ratings exercise to the brokers once enough data has been collated. 

But Matthew Perry, co-head of execution services for Asia at Société Générale, notes that a facilitation desk is often involved at times when a client looks to action an IOI but has a different execution target to it. Orders are qualified either by price limits or benchmarks, such as VWAP.

“As dealers we strive to get the best execution for our clients, and that might involve the facilitation desk to achieve that,” he says. “However, banks need to be transparent around their processes. At the same time the buy-side need to be more open-minded around this process.”

Richard Coulstock, head of dealing at Eastspring Investments (Singapore), estimates that 10% of trades done by his team are off the back of an IOI. But says there are ways buy-sides can manage IOIs sensibly before showing their hands and responding to an IOI.

“The buy-side needs to be aware of the time element,” he notes. “For example, if an IOI is two hours old then the buy-side needs to err on the side of caution by assuming that the validity of the IOI may have been compromised.”