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July 1, 2008

The IOI Beat

By Michael Scotti

This issue of Traders Magazine centers on indications of interest and their various forms. At one time, IOIs were almost primitive. An IOI was a broadcasted message from the broker to the buyside, who'd respond via the phone. That was the old high-touch game that used a sales trader as the gateway to block trading.

Although traditional IOIs are still important, the rise of electronic trading has changed-some might say diminished-the role of the sales trader in cash equities. This month's cover story outlines the sales trader's evolution. Many traders who've survived the downsizing trend since 2001 have found new homes at brokerage firms that pay them based on their production. Staffer James Ramage reports that the ranks of sales traders are down about 20 percent in the last year, but the real success story has been the rise of the independent firms offering variable compensation. They've hired experienced sales traders who have been able to capitalize on a combination of their skills and long-established relationships. It is a compelling story.

You've read plenty about self-directed trading, so how much of a stretch is it for the buyside to send IOIs to each other through a broker? That is the gist of another feature this month. The new product involves a partnership between agency brokers Pulse Trading and Bloomberg Tradebook. You'll find some insightful comments from a competitor and from two buyside traders. No one is claiming the new product will kill brokers' IOI business. But you can bet the sellside is more than a little concerned about anything that could eat into its dwindling high-touch, full-commission business.

The third leg of this month's IOI trilogy focuses on a buyside survey about dark pools. The survey, put together by staffer Nina Mehta, reveals that the buyside is unsure about some developments at dark pools. Take, for instance, this finding: 38 percent of the buyside did not realize that some dark pools send IOIs and immediate or cancel orders to other dark pools. This messaging between pools was the subject of Traders Magazine's cover story last month. The survey on so-called "gray pools" was sent before last month's cover story was published to get a read on what the buyside knows--or doesn't--about the pools that they use.

Interestingly, roughly one-third of the respondents said dark pools should be true to their name and should not send IOIs and IOC orders to other pools, while slightly more than one-third said it was perfectly OK to send those messages between pools. You never know what a survey of 130 buysiders will report. Enjoy the IOI stories and the issue.


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