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August 1, 2012

New and Improved

Quality of IOIs Rises Due to Client Demand, Competition and Regulatory Scrutiny

By John D'Antona Jr.

The once much maligned indication of interest has been reinvented. The buyside has long complained that these electronic messages from brokerage firms, expressing willingness to trade a block of stock, were nothing more than fishing expeditions to capture an order.


Too much noise. Too little information. No real order. Those were the complaints of the buyside about what are commonly referred to as IOIs. But something has happened in the last year to dramatically improve the quality of IOIs---and clients’ attitudes toward them. Messages to clients are accurately marked as natural liquidity when an IOI represents a client order on the other side of the trade. And if an IOI reveals that a broker is willing to commit capital, a so-called “super,” it too, for the most part, is clearly marked for clients to decide if they want to interact with an it.

It was a challenge for the buyside to view the tens of thousands of IOIs broadcast every day. They had to figure out which were natural liquidity and which were just looking to glean information about their trading intentions---and snag an order. But today, the sellside tiers their IOIs and targets them to select clients who are more likely to trade a particular stock, based on their holdings. Consequently, the IOIs that go out today are better than they’ve ever been. 

Kevin Chapman

So what happened? First, the buyside told the sellside to clean up its act---to clearly mark IOIs as natural when an order is behind them. The sellside complied in the recent downturn, as it saw the continuation of low trading volumes and falling commissions. The last thing it wanted was to alienate a client and have its IOIs from the high-touch desk ignored by a trading partner.

The other factor was regulatory: The Financial Industry Regulatory Authority began a crackdown on mismarked IOIs from brokers last October. But traders say the industry was already improving things before FINRA got involved. FINRA only speeded up the process.

“The best way IOIs have changed is that the sellside has taken a lot of the noise out,” said Kevin Chapman, managing director and head of trading at San Diego-based Allianz Global Investors Capital. “The sellside now sends IOIs that are for the most part naturals that want to trade.”