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January 30, 2008

Looking for Action in IOIs

Traders want indications of interest recast as firm quotes

By Nina Mehta

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They're no more than electronic messages at this point. But a growing number of trading executives argue that indications of interest should be looked at as firm quotes that can be automatically traded against by the buyside.

"The nirvana is executable IOIs," says Robert Moitoso, head of the FIX division at NYFIX, an institutional broker and technology provider whose IOI dissemination product has been distributed via the NYFIX Marketplace network for more than two years. "The sellside can spend a lot of money distributing IOIs to their client base. They want to know if they're getting bang for that buck--and executable IOIs would let them measure that."

An executable or electronically actionable IOI is a message containing trade data that can be clicked and executed immediately by its buyside recipient. As such, it would take on some of the characteristics of a firm quote sitting on an exchange or ECN. In comparison, traditional IOIs are indications, or messages, from a broker to buyside firms that invite a telephone call and a negotiation. Demand for executable IOIs is coming from segments of both the brokerage and buyside community. On the buyside in particular, interest in clickable IOIs is part of traders' need to source block liquidity more efficiently.

Moitoso, who spent two decades at AutEx, the granddaddy of IOI distributors, recognizes that what's being asked for now is a tall order. "Actionable IOIs are an elusive target," he notes. "No one really has their arms around how to execute on an actionable IOI." He observes that an IOI is essentially "a message, a feeler that says, If you want to trade give me a call and we can probably do something, but we have to talk about it first.'"

Albert Lojko, head of institutional equities at Tradeweb, which owns AutEx, agrees that interest in making IOIs electronically actionable is flourishing. "That's probably where the path will lead, because brokers then can better correlate their return on investment for a particular message," he says. But he too doesn't expect actionable IOIs to take over the world of block indications.

Some buysiders are ready to auto-execute on indications. "If the IOI delivery systems improve and IOIs are more specifically targeted and contain good actionable information, we'll use them," says Joan Stack, trading manager at the Ohio Public Employees Retirement System, an $84 billion pension and health-care fund.

"Actionable IOIs is where the IOI space is headed," says Robert Shapiro, executive director of trading and execution analysis at Morgan Stanley Investment Management, which has $597 billion in assets, including $300 billion in equities. "Interacting with clean, strategically desirable IOIs will be a much more important part of our liquidity-sourcing endeavors in the future."

Joe Cangemi, co-head of electronic trading sales at agency broker BNY ConvergEx Group, notes that some buyside traders are eager to auto-execute IOIs. "There is a segment of the population that's moving toward electronic trafficking and execution," he says. But it's not the entire population. He adds: "Those executions will never supplant the broker-assisted block liquidity sourcing that is the mainstay of our agency business and necessary for many customers."

Indicating Out