One order book to rule them all

Monday’s announcement that IHS Markit is buying Ipreo changes the game for the pre-eminent tech firm in the primary bond markets.

The electronification of secondary bond markets has seen a scrum of different standards fight for market dominance, with a bewildering range of innovation in everything from new order types, to disintermediating banks, to dark pools, daily auctions, matching engines and order books.

But primary markets have largely stood apart. The dominant firm using tech to revamp primary execution is Ipreo, owner of the IssueNet technology which links together syndicate desks’ order books, vastly speeding up reconciliation, cutting away the tedium of knitting together Excel sheets, and allowing banks to price and allocate the largest of jumbo deals inside a single working day.

Thanks in large part to this dominance, its UK subsidiary earned a healthy £22m in pre-tax profit in 2016, the last year for which figures have been published, on a turnover of £30m. Group figures are harder to come by, as the firm, incorporated in opacity haven Delaware in the US, has been privately held for years.

But its latest initiative has been about capturing the next stage of electronification in the primary markets. Investor Access gives banks a way to announce and distribute deal information directly to investors, and to take orders directly from those investors as well.

Like IssueNet, the initiative has the potential to cut out enormous amounts of tedious busywork — the forwarding and relaying of endless Bloomberg messages — and to cut costs in the bond underwriting business, while easing regulatory compliance.

The initiative was announced in 2015, going live in January 2017. But despite more than 30 banks signing up, it has yet to become a true market standard like IssueNet.

No banks think the business will stay the same forever, or that technology will not eventually sweep through bond underwriting, but equally, some big beasts of the bond market; the likes of BAML, Barclays, Citi, Deutsche and JP Morgan, are not yet signed up to Investor Access and may never be so.

Some of the firms blame poor design in the interface, or poor connectivity with investors, but by far the greatest fears in adopting Ipreo as the universal standard is that it creates another market monopoly — with monopoly-style profits gouged out of syndicate desks' P&L.

Compounding this fear is that the beneficiary of such profits would be Goldman — the only American bank so far to sign up to Investor Access.

Now the firm is changing hands, at least the latter excuse goes awa. Meanwhile, bundling Ipreo’s products with pricing and benchmark products from IHS Markit might make the case for adoption compelling.

Increasing the penetration of Investor Access beyond its Eurobond heartland is indeed a big part of what IHS Markit plans for Ipreo — the pro forma revenue guidelines released on Monday expect double digit growth for the firm, once it nestles down in the IHS stable.

But time is running out. Though Ipreo has a large technological head start, three US firms, Bank of America Merrill Lynch, Citi, and JP Morgan, are working together on a bookbuilding platform focused on the US investment grade corporate market.

This is an area where there is virtually no adoption of Ipreo’s Investor Access — and where the three banks working together control a huge share of the market.

The announcement only came earlier this year, and there’s no indication so far of how committed US investors are to the project. But it is using technology from E-Trading Software, which in turn uses the common language from the market-owned Neptune initiative.

That ought to ease adoption issues, while the immense market power of the three banks involved should be another spur to development — quite simply, investors that want access to new issue flow will have to sign up.

The size and depth of the US investment grade market also means other banks will likely sign up as customers, once the system is up and running. Every bank wants to be able to show face in the market (even if only as junior passive co-manager on an acquisition takeout it barely touched) and so every bank is a potential customer.

For these firms, though, a system owned by the three largest banks in the market might actually seem worse than Ipreo — just another way for the Wall Street firms to protect the lucrative fortress of their domestic market.

The ideal ownership structure for a piece of market infrastructure like this is co-operative — the major users would also be the owners, giving every incentive to be responsive to customer need, without gouging on prices.

There is plenty of precedent for such a structure. Most exchanges started life as market co-ops, as do many pieces of payment infrastructure. Markit, the provider of CDS indices, and Ipreo’s new owner, was originally owned by a group of major CDS dealers, persuaded by the firm’s founder, Lance Uggla, that transparency would help grow the market for everyone.

Co-operatives can take longer to get going, with unwieldy meetings and some lack of direction, but they ensure a standard is genuinely accepted across the market.

But Markit itself illustrates the cautionary tale of co-operative infrastructure. The firm’s core business was a dazzlingly successful in the pre-crisis credit trading boom era. Markit made plenty of acquisitions — to the point where its potential value could not be ignored by the dealers which owned it. It was floated in 2014, and conducted a “merger of equals” with pricing evaluation firm, IHS.

In other words, it was a victim of its own success. Investment banks were eager to book profit up front, regardless of the potential cost in the long run.

That is always going to be a risk. Developing quality technology needs investment, capital, and clear direction, all easier to find in the private sector than in a co-op. Compromising on a community ownership structure can mean everyone gets to use a better product, faster, albeit perhaps more expensively.

Other hybrids exist. Building propietrary products on the same basic infrastructure is one approach, used by the IT industry for decades. If everyone uses systems that use the FIX trading language, the new structure of legal entity identifiers, which can connect together, there might be scope for several different brands of bookbuilding platform.

But a balance, hopefully, can be found. It’s better for everyone if the systems used across the market are mutually compatible — whether than means using the same language, or everyone using a single vendor’s products. Now Ipreo is out of Goldman’s hands, it stands more chance of being that vendor.