Herb Werth, Managing Director of Buy Side Product Strategy and Marketing, talks about how the buy side and sell side have come together to change the way deals get done.
In January, Ipreo launched Investor Access, an industry-led initiative that allows institutional investors to submit orders directly, through our system, to the sell-side syndicate banks on fixed-income new issues. The program is the result of an ongoing development process that featured collaboration from both the buy-side and sell-side communities with whom Ipreo works every day.
Now that we are in the second quarter of 2017, and momentum continues to grow on Investor Access as more and more firms use the platform to execute deals, the Ipreo Blog sat down with Herb Werth, Managing Director of Buy Side Product Strategy and Marketing, to discuss why Investor Access was necessary, how things are going, and what’s next, in this three-part series. (Read the full interview.)
PART ONE: An Industry-Led Initiative
Blog: Tell us about the genesis of the initiative. This started by request from the banks, right?
Herb Werth (HW): Essentially, yes. In speaking with our investment banking clients, we knew how eager they were to streamline their processes, in particular, to be able to deliver deal information to, and receive orders from, the buy side in a more efficient and automated fashion.
Blog: How do you begin to tackle a project of that scale and complexity?
HW: We realized that what we were talking about was essentially modernizing the way the markets work. Both the investor and the bank play an active and important role in the process, and the banks are very knowledgeable about the things they need to do to bring the deals to market in a way that’s compliant with regulations. When it comes to improving the existing process, you have to understand what’s working well – and ensure that those aspects are preserved throughout the process – and then look at those areas that can be enhanced to determine which ones move the needle the most. The best way to do that is to work in partnership with the interested parties to build consensus around a solution.
Blog: How do you ensure buy-in from both sides?
HW: We have strong relationships with our buy- and sell-side clients. We work with them to understand their challenges, and we design solutions that will serve their needs; that collaboration has been crucial. To get a high level of buy-in, you first need to have an idea that improves things for the parties involved, and you have to listen to the suggestions and concerns from those parties. As the process develops, it’s not linear, it’s a feedback loop; we synthesize and incorporate their feedback on an ongoing basis. That process doesn’t stop once we’ve launched the platform. So, in addition to simply growing the number of deals that are done on the platform and increasing the size of the community, we’re also listening to feedback to help us decide where to take the platform next. We’re constantly making sure that what we’re developing is sympathetic to how our clients want to work.
Blog: Which requires constant communication…
HW: Yes. Ipreo is in a good position here. If you look at the footprint of our bookbuilding and IssueNet business, Ipreo really is the leading solution provider in bringing new bond issues to market. I only mention that because our relationships with the banks that use these platforms enable us to more easily have these conversations about what can be done to improve these processes as an extension of the service we could provide to them. We’ve also built a robust community on the buy side as well, and that group has been especially interested in improving the existing processes that have been largely unchanged for a long time. We realized pretty early on that in order to move forward, we needed to bring the market participants together and help facilitate that discussion.
Blog: And what did you learn?
HW: Through those conversations, it became clear that the buy side really had two key problems: they wanted to get terms and conditions in a more consumable format than they get today, and wanted to be able to communicate their orders and receive their allocations in a more efficient way (which tended to be electronically). Investors have been feeling this pain for a long time, so knowing that the sell side was involved in trying to alleviate it was comforting to them.
Blog: What was the collaboration process like as you prepared to launch?
HW: As we shifted our focus from building to implementation, we looked to the network we had created. We had established steering committees with both the buy and sell side, and we made sure to get their support for our testing and roll-out process. Both the buy-side group and sell-side group worked together with us to run a number of sample deals to make sure that everyone was comfortable with the workflow and the functionality of the system. We did dozens of smaller tests in order to make sure that all firms that were interested could participate, and this led up to a larger market-wide simulation this past December which ran the full deal workflow with all market participants and demonstrated that the platform was scalable and ready for production use. The banks chose to run their first live deal during the first week of January of this year, and since then we’ve seen a good uptake by both the banks and the investor community in using the platform.
PART TWO: Alleviating the burdens
Blog: Stepping back a moment to the premise of this initiative, why this market at this time?
HW: The fixed-income markets in general have historically been slow to adopt change, as compared to other asset classes. But the past several years have been very strong for corporate new issuance. Today, there are a multitude of platforms that are trying to provide additional options for liquidity, competing for flow in the secondary market. This implies that the dynamics in the market have changed quite a bit and that participants seem to be open to innovation – if these initiatives help them achieve their objectives. Fixed-income primary markets are ripe for advancements as the market overall is modernizing.
Blog: In what ways?
HW: With respect to new issues, the time to bring deals to market continues to compress – today, most fixed-income new issues are completed in a matter of hours from announcement to final pricing. The number of large deals – commonly called Jumbo deals, which are defined as over 5 billion dollars – has increased. So, we’re basically seeing bigger deals getting done faster.
In that process, banks need to coordinate the dissemination of information, the collection of orders, the reconciliation of order books, and the communication of allocations and pricing. You really can’t do that without technology, and our new-issue software on the sell-side has helped enable that process. On the buy side, there’s a similar challenge – the trader must find out about these deals, communicate inside the firm to their investment team, collect orders back from PMs, figure out what internal demand looks like, then reflect that back to the Street. Until recently, we hadn’t really had the opportunity to help the buy side solve that problem.
Blog: Enter Investor Access.
HW: As we were putting Investor Access together, what we heard from some of the market participants we’ve talked to echoed that on busy new-issue days – days with maybe five or ten deals in the market – the trader is put in an untenable position. They need to do all of the tasks that I just described for each deal in the market! Buy-side firms are being forced to utilize their people in ways that don’t maximize their value. Quite often, they have someone who is highly trained, designed to add value as a trader on the desk, and that person is forced to spend a massive amount of time on administrative-type work (forwarding emails, manually collecting and tabulating orders, etc.).
What we hear today when we talk to a lot of buy-side traders is “On a busy new-issue day, that’s all I do. We effectively shut down non-essential secondary trading, I don’t do anything else that I would normally do, and I’m spending all my time on this.” Even if that was the most valuable thing in the world for the firm, the amount of admin work buy-side traders are burdened with just to participate in the new-issue market is disproportionate. If you think about it in the context of a single deal, this manual workflow might be tolerable. But in the context of a day with five to ten deals in the market in a two- to three-hour window, there’s an opportunity to miss something. You can miss a deal altogether, you can miss an update from a PM, you can miss an update in pricing from the Street, or there’s just simply an opportunity to make a mistake, to mis-key something or mis-communicate something, things like that. It becomes a conversation about risk.
Blog: And these days…
HW: If you look at corporate new issuance over the past five years, it’s routinely been over a trillion dollars a year. The number of deals in the market is massive. We feel that Investor Access helps all of the participants in the new issue market gain efficiency and reduce risk, and we think that that’s good for the market as a whole. The ultimate test of whether Investor Access is a success won’t simply be whether a piece of technology was adopted, but also whether it ultimately benefited all market participants. That’s the positive change that we’d like to be able to say that we brought to the market.
Blog: And thus far, thanks in part to the spirit of collaboration that has been essential to the project, has that been paying off?
HW: Definitely. Extensive collaboration with our customers helped ensure that what we built would be used by the market. I can give you one example of how we’re seeing that pay-off: when we started, some firms liked the concept but wanted to see that this initiative “was real” before they fully committed. Fair point. There are a lot of good ideas that lack the execution or follow-through to make those ideas into reality. Now that we’ve launched, those people have taken notice and have responded accordingly. Momentum continues to increase since the platform has gone live.
Blog: After five months, where does Investor Access stand?
HW: We’ve seen significant uptake in the buy-side firms who have converted from being trial users evaluating the platform to being fully enabled for electronic order placement. We’ve on-boarded a good number of new buy-side firms as well. The number of banks that are participating in our platform – both in terms of those that are publishing terms and conditions and those that are able to accept electronic orders – is growing on a continuing basis. We’re doing deals every week. In short, we feel that the adoption of the platform is a strong recognition of the utility it can bring.
Blog: So already some of the issues Investor Access was designed to handle are being soothed?
HW: What ultimately results is a smoother workflow for the banks involved. Investors have the opportunity to have a well-organized deal calendar and the ability to interact electronically with the primary market. And there are additional benefits: because there’s a single set of deal terms communicated to the buy side through a collaboration process among the banks, it ensures the terms and conditions are exactly the same, no matter which bank sends them. We think that results in high-quality data that can be trusted. Finally, both the buy side and sell side have a consolidated, matching audit trail of the deal, something that was difficult to achieve using the legacy processes that existed before Investor Access.
PART THREE: Continued primary market innovation
Blog: What’s next for the Investor Access initiative?
HW: A key objective right now is to continue growing the Investor Access community and increase deal flow. A key tenet of our development process has been listening to our customers, and this will continue to guide the platform’s direction. There’s an opportunity for folks on both the buy and sell side to get involved with Investor Access, to provide feedback into the ongoing innovation process with the other members of the community, and make sure that what we’re developing benefits their own workflow.
Blog: Has that feedback clued you into other pain points?
HW: We’ve heard from our customers that there are some buy-side-specific tools that would be useful to fill some gaps that exist at a lot of firms, one of which is to improve the workflow between PMs at a firm and the trading desk, particularly with respect to new issues. This is a way for PMs to be informed of the deals – along with color from their traders – to indicate their interest to participate in those deals, for the trader to watch their order book aggregate in real time and to be able to reflect that to the street. There are also provisions for other people at the firms such as credit analysts or operations folks to be involved in that process where appropriate.
Blog: Which just furthers the theme of collaboration!
HW: Yes, definitely – we’re extending the concept of collaborating on a deal to not only involve the trader and sales/syndicate, but now to further help with those processes that are internal to a buy-side firm as well. The other thing that we’re somewhat uniquely positioned to do is easily provide a consolidated audit trail of everything related to the new-issue process from deal communication to the actual terms and conditions of the deal. This includes: messages that come from the banks, any internal commentary that’s captured on the deal by the PMs or traders, the actual orders that are submitted and each step along that process (including order modification or cancellation), and finally, the allocation and pricing of the new issue. All of that is captured in a single, consolidated audit trail that will be accessible through either a user interface that we could provide, or through an audit feed extracted and integrated into existing workflows for compliance.
Blog: Anything else?
HW: For decades, our core business has been around sell-side workflow and we’ve recognized the need to integrate with the systems and workflows that are specific to these banks. We’ve now built this bridge between the buy side and the sell side with Investor Access, and we’re leveraging our expertise in workflow solutions, bringing it to bear for the buy side in streamlining their processes as well.
Blog: How so?
HW: We are implementing a series of integration points which will do several things: they will allow investors to integrate new-issue terms and conditions data into their in-house systems, they will allow for the submission of orders and the receipt of allocations electronically using the FIX protocol, and they will allow audit trail data to be integrated into other internal systems. Those are things that our buy-side customers have specifically requested. Through our Integration Services, whether for terms and conditions or orders and allocations, we’re effectively providing access points for both in-house systems and third-party solutions (such as order management systems), to interface with our platform in order to allow for seamless workflow between the existing platform at a buy-side firm and our solutions.
Blog: And how about global expansion?
HW: Our existing businesses already have a strong global footprint – Ipreo serves clients in every major financial hub around the world today. Accordingly, the Investor Access platform was always built with global implementation in mind. We realize there are certain nuances to primary issuance in different parts of the world, but there is also a lot of commonality in workflows.
The ability for banks to publish deals to investors is deployed globally now. We initially launched the electronic order/allocation process in Europe, given the strong demand from the community there. We now have a great deal of interest from a number of banks and investors in Asia and are actively working to replicate the progress we were able to make in EMEA in that region. From a technical perspective, implementing Investor Access in new regions is not difficult; and following the success of the EMEA roll-out, the interest and momentum we’re seeing in other regions is exciting.