Increased automation of the IPO order book would help to improve the process of investing in new issues for the buy-side, according to theTRADEnews.com’s April poll.
A majority of 56% of readers said that better automation would improve the IPO process, potentially encouraging increased interest in new listings from investors and bolstering the wider economy.
Reforms to IPO markets have been a major focus on the financial services industry in Europe and elsewhere, as capital restraints imposed by Basel III and the fallout of the 2008 financial crisis have made banks more reluctant to finance businesses, making capital markets funding increasingly important to help firms fund their growth.
FIX Trading Community’s buy-side committee has been working on ways to improve the automation of IPOs, though its work remains in the early stages of development.
Mark Hemsley, CEO of pan-European exchange BATS Chi-X Europe, believes automation of the IPO process would be beneficial for buy-side investors, but is still a long way from being realised.
“Development around automated order aggregation is at a very early stage and hinge around developing technical standards so that orders for new issues can be submitted in the same format,” he said.
Judith Hardt, director general of the Federation of European Securities Exchanges (FESE), which also recently launched a task force to improve the European IPO market, said measures to improve automation was a concept that could be integrated into new European laws to ensure the listings process helps both investors and businesses.
FESE’s task force is aiming to highlight Europe’s lack of IPOs to the European Commission in the hope it will instigate laws similar to the US Jumpstart Our Business Startups Act, which reduced many of the burdens of listing for smaller firms to encourage more investment in SMEs.
“We need to look at ways to make equity capital more attractive for investors and firms. As a result of recent European directives, more pension funds and insurers are investing in fixed income instead of equities. We need ways to help companies list while also protecting the interests of investors,” Hardt said.
Over a third of respondents to theTRADEnews.com’s poll said they would like to see longer lock-in periods for those who are listing new businesses. Normally, an exiting investor will be required to continue holding a significant stake in the business they list for six months after the IPO. However, some will then sell their stock en masse, potentially having a negative impact on its value which can be bad for buy-siders investing in listed stock.
A smaller group of 11% of survey respondents said that IPOs should be subjected to more regular tick size reviews.
Hemsley said determining the liquidity profile of a newly-listed company can be complex and setting the wrong tick-size could make a company more difficult to trade.
He explained: “There is definitely a case for having more flexible tick sizes for new issues once they have been standardised as part of MiFID II. The listing market should have an obligation to keep the tick size under review, perhaps as often as weekly in the first month of trading a stock, to ensure it has an appropriate tick size for its liquidity profile and price.”