Tradeweb’s AutEx Finds Contra-Side Liquidity for Smart IOIs

In a race to improve indications of interest, Tradeweb’s AutEx is expanding its IOI repertoire. It’s now supplementing the Natural IOIs broker-dealers send out with targeted messages aimed at those with contra-side liquidity. These IOIs will be sent to institutions based on the flow they are routing through Tradeweb’s FIX network.

Tradeweb’s AutEx expects to have between 15 and twenty broker-dealers using its new Smart IOIs by the end of next month. The product, released late last year, enables brokers to target contra-side liquidity the brokers don’t know about, based on flow streaming through the Tradeweb Routing Network.

“We enable brokers to safely go beyond their target list to people who are contra-sided,” said Jim Fiesel, head of equities at Tradeweb. “We will find the contra-sided institution for the broker.”

Tradeweb runs AutEx, the granddaddy of IOI networks. But while IOIs enable brokers to source liquidity from the buyside, the daily IOI parade typically includes a vast number of messages ignored by the buyside, along with those Natural IOIs representing institutional flow that are deemed valuable.

“We’re doing this so brokers can target who’s on the other side of the IOIs and find contra-side parties without significant information leakage,” Fiesel said. “For the buyside, we’re making sure that they see indications that are relevant.” Smart IOIs will typically supplement Natural IOIs that brokers send to their own target lists.

Buyside firms whose orders are routed through the large Tradeweb Routing Network must agree to let Tradeweb use their information in this way to receive Smart IOIs. So far, 140 buyside firms have agreed, Fiesel said. By midyear, he expects the number to reach 300.

Tradeweb Routing Network is one of the industry’s largest FIX order routing networks. It connects to more than 1,000 brokers and institutions and has more than 8,000 connections, according to the company. Before Tradeweb was spun out of Thomson Financial as a separate company in early 2008 (prior to the merger of Thomson and Reuters), the FIX network was called Thomson Order Routing Network. Tradeweb is owned by nine big broker-dealers and Thomson Reuters.

Tradeweb’s effort to enhance its IOI offering comes at a time when Bloomberg and NYFIX, its main competitors, are also offering customers better targeting and IOI tools. Bloomberg, for instance, is gradually rolling out new IOI analytical products for its terminal users.

To protect the buyside, brokers sending out Tradeweb’s Smart IOIs are not aware of which institutions receive the IOIs. If the institution receiving a Smart IOI wants to respond, “it can then pick up the phone and engage with that broker,” Fiesel said. He noted that Smart IOIs are integrated into buyside execution management systems such as Portware, as well as major sellside trade order management systems such as Fidessa.

This new product functions as a liquidity-sourcing tool for the sellside and buyside. “If brokers have another resource, another way to tap into liquidity, I expect they’ll use it,” said Phillip Silitschanu, a senior analyst at research firm Aite Group. “To get the best possible trade, they may be willing to give up some of the control over who the IOIs are sent to.”

A head trader at a buyside firm in Chicago said the product would probably be welcomed by institutions. “My initial thought is we wouldn’t have a problem with this,” he said. “It brings us additional liquidity.”

In March Tradeweb sent out Smart IOIs representing 135 million shares, Fiesel said. “That’s liquidity that wouldn’t have been seen by institutions because they weren’t targeted by the internal systems of brokers,” he added. Last month, he noted, some brokers executed double the volume in names for which Smart IOIs had been sent out than they did in those for which Smart IOIs weren’t used. “All brokers increased their executed volume in names they sent out as Smart vs. what they accomplished with their own targeted lists,” he said.

The Smart IOIs are sent only to firms that have been trading on the contra side in that name. Tradeweb’s Smart IOI algorithm determines who should receive the IOI based on the stock, its average daily volume, the flow being sent to the markets by the particular buyside firm, and other trading characteristics. Fiesel noted that the algo makes decisions dynamically as market conditions change, and that liquid and illiquid stocks have different requirements.

He declined to elaborate more on how the algo creates target lists of buyside firms, but said the goal is to increase block matching opportunities between buyside and sellside firms. “We’re making sure that buyside firms see indications that are relevant,” he said. Part of this process, he added, includes ensuring that buyside firms trading small size don’t see Smart IOIs.

Tradeweb’s Smart IOI product has been in development since last summer. Some of the company’s nine broker-dealer owners are using Smart IOIs, Fiesel said. The nine brokers include Goldman Sachs, Credit Suisse, Deutsche Bank and others. Tradeweb also operates an online marketplace for fixed income and derivatives, which provides pre-trade data, execution and post-trade processing services. That platform is separate from the FIX network in equities.