This week, Agence France Trésor, the French sovereign debt office, confronted the issue by actively engaging investors during the book building process for the sale of its second green OAT.
To avoid what it called “exuberant” orders, it asked fast money accounts — the main culprits behind inflated tickets — to put in sensibly sized orders that actually reflected the true demand of the bond.
This was a novel approach. Spain and Italy also tackled the problem of inflated orders earlier this year by aggressively bringing in the spreads to leave little value for fast money accounts to stick around, resulting in colossal drops in the orders. Actively engaging with investors during the syndication process will avoid such unnecessary drops in the books.
Issuers should work together to devise a collective strategy. But it’s not just the responsibility of issuers to tackle the problem of inflated orders. Lead managers need to hammer home the message when they communicate with investors. What if banks published order book statistics before the final allocation to show the extent of inflated orders from fast money accounts?
If an order is suspected to be inflated it should be reported to the regulators as inflated orders have been illegal under the European Market Abuse Regulation since July 2016. Regulators themselves need to do more. And of course, investors themselves have to stop this habit. It’s everyone’s duty to put an end to the inflation of order books.