As the UK IPO market continues to dwindle and London becomes an increasingly unattractive place to list, the Investment Association has resurrected a decade-old FIX project advocating for the automation of the equity IPO process.
Currently, IPO and secondary market placement require sell-side brokers to manually gather information from sources to place orders. This process has a high likelihood of mistakes due to human error, and amendments to orders before they reach the syndicate book can mean investors are unaware of their commitments, or exposed to incorrectly-placed or received orders.
“This manual process is archaic and needs to be improved,” affirmed Adam Conn, head of trading at Baillie Gifford, and chair of the Investment Association’s equity trading committee. “The IPO process has always been the standout in the sense that it’s so manual. Generally, there’s a desire to automate and electronify where possible. It makes no sense to keep it the way it is. If people want to do it manually, they can. But if you don’t have to, why would you?”
The initiative has been developed from a 2015 FIX Trading Community project, which outlined the benefits of straight-through processing in the IPO process. “Other things took over – MiFID, Covid and various other issues,” Conn told Global Trading. “Now, firms are looking at it again. I think there’s more buy-in now to get it done, there’s very strong demand from buy-side firms and support from a number of capital markets teams.”
Between November 2023 and October 2024, IPOs in the UK raised US$1.19 billion according to Bloomberg data. This put the jurisdiction in 15th place globally, below capital raised in the Malaysian ringgit (US$1.5 billion), the Polish złoty (US$1.7 billion) and the Omani rial (US$2 billion). It narrowly surpassed the Taiwanese new dollar (US$1.16 billion) and the Russian ruble (US$1.13 billion). At the top of the rankings, IPOs in the US dollar raised US$47.59 billion – and does not have an automated IPO system.
Attempts are already in place to improve the UK’s IPO landscape, with the FCA making major changes to the country’s listing rules this July. Similar efforts are being made in Europe, with the European Council simplifying the listing process for EU companies in a bid to keep startups in the region.
READ MORE: FCA overhauls listing rules to boost UK stock market
“Like all change projects there will be initial investment required, but the benefits will be a net positive to the industry,” Conn stated. According to the Investment Association, these benefits include greater transparency and efficiency, reduced risk and the ability to place orders out of market hours. The risk-mitigating system would allow asset managers to ensure orders pass pre-trade compliance checks in line with relevant mandates before they are sent on to deal managers, the report added.
In the allocation process, designated counterparties would fill orders through a vendor or platform. On the sell side, automating IPOs through a ‘portal’ would allow deal distribution to be broadened and standardised while cutting error-related costs, the paper said. The association advises that buy- and sell-side firms adopt third-party service vendors to facilitate this transition, rather than building solutions in-house. This will minimise the infrastructure changes required, and further reduce costs.
Beyond IPOs, automation and electronification are key focus areas across equity capital markets (ECM) and beyond. This practice should eventually cover all book-building processes on the ECM desk, the paper says, noting that “the efficiency gain from further electronification does not start with and stop at the IPO process”. Automation projects should take a long-term approach, it continued, with the capability to cover the secondary market.
“The intention is that when we get this to work, it could be adopted across different regions. It’s not designed purely to be a European-only project or process. The hope is that over time it will become the standard,” Conn added.
In its call for action, the Investment Association concludes that market participants across the industry must collaborate for this project to succeed: “This transformation is not about enhancing individual firm’s operations but about elevating the entire market structure to a new level of efficiency and transparency.”
©Markets Media Europe 2024
