From Idea to Investor Access: What It Takes To Innovate in the Primary Markets (Part Two)

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 Accessan 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 part one.)

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.

Next week, our third and final part explores what’s next for the Investor Access initiative. Read part one.