New tech disrupts traditional book-building process for institutional investors

When it comes to innovation, markets can be deeply paradoxical. The capital markets have reared both the supremely technologized world of high-frequency trading, where players compete for a nanosecond edge over their competitors, and the laggard segments where fax machines and legacy programming languages like Cobol are still commonplace.

Or, take the book-building workflow for institutional investors looking to trade equities, for example. As it stands, this is a manual process: The institution engages an investment bank or broker, which calls around the market manually to find counterparties for the deal.

This comes with some significant downsides. It can be slow and painstaking, particularly when the size of the trade exceeds the average number of shares in stock, better known as the average daily volume, or ADV. Sourcing liquidity for deals like this can take a broker hours, and it’s not uncommon for the market to move in that time, driving up the price of the trade.

And there is also the question of data sovereignty. By outsourcing the handling of its market plan to a third party, an investor is effectively surrendering control over how the deal is executed. Some institutions are understandably wary of handing over a glimpse of their trading intentions to a broker or investment bank, which could theoretically use that information against them.

There has been a proliferation of technology over the last 15 years, but that has only gone so far when it comes to multi-day ADV deal building

Mark Badyra

One vendor, Appital, believes it has a solution. Buy-side traders can insert their demand into its BookBuilder platform, which will then connect them with other market participants and give them a picture of the liquidity available to them. This process is anonymous, and the details of an institution’s intent can only be seen by the platform, circumventing the conflict of interest inherent in disclosing demand to a broker.

Mark Badyra, founder and CEO of Appital, was working on the equity capital markets syndicate desk at UBS when he became aware of the problem. “There has been a proliferation of technology over the last 15 years, but that has only gone so far when it comes to multi-day ADV deal building,” he says.

Struck by the scale of the inefficiencies he’d identified and the potential value of eliminating them, Badyra decided to leave his job at the Swiss bank and try to build a solution. “Nobody was doing anything about it. The exchanges kept on servicing the market in their specific way, and the brokers, too. I couldn’t see anyone building this technology, which I thought was required for the market. It felt like someone needed to do it, so why wouldn’t that be us?” he says.

The idea was to create a platform that would connect asset managers directly to one another, with a set of algorithms in the middle to work out price and allocation. This peer-to-peer model would save brokers time and money, and afford them a view of latent liquidity in the market, which the established, manual book-building process often misses.

Bridging the trust gap

Badyra founded Appital in 2018 along with co-founder and CTO Pete Correia.

“The first step was going to be ‘How do you get mass? How do you get credibility? How do you get trust?’ That led us to the idea we needed. We needed a partnership with an exchange in order to get this off the ground,” Badyra recalls.

This was where chief business development officer Brian Guckian came in. Guckian understood the need for a trusted partner: For him, trust was central to Appital’s appeal.

“I think asset managers have felt short-changed over the last 20 or so years,” Guckian explains. In the more than 25 years that he spent working at investment banks, Guckian witnessed firsthand how asset managers were marginalized in the book-building process and allocations. “I’ve seen how it works: We ranked all of our clients from tier one to tier five, and there was very little visibility in terms of how asset managers were allocated big block transactions.”

Indeed, events over the last year have validated institutional asset managers’ concerns about information leakage time and again. Regulators in Europe and the US have investigated investment bankers for disclosing information over WhatsApp, and there have even been situations where leaks about a hedge fund closing its position appear to have come from a prime brokerage. “It’s not just a case of inefficiencies, it’s more trust and transparency that are missing,” Guckian says.

Guckian pitched the platform to the London Stock Exchange Group’s (LSEG’s) multilateral trading facility (MTF), Turquoise, in 2020. Turquoise was based near Appital in London, and with experience in electronic block trading, it felt like the natural choice. LSEG agreed with the use case, and struck up a partnership allowing Appital to connect to the Turquoise platform.

“Brian [Guckian] reached out to explore how to bring a book-building process to the buy side that would automate manual, opaque processes,” says Robert Barnes, who recently left his role as CEO of Turquoise and global head of primary markets at LSEG. “Mark Badyra also shared with us his experience of manual book-building,” he adds.

With Turquoise on board, the Appital team turned its attention to the more technical problems of design, integration, and testing. When it went live, the platform would have to seamlessly integrate with a trader’s desktop, and connect with their execution management system (EMS), with LCH (formerly London Clearing House), and with brokers. It would also need to be validated at a rigorous cybersecurity standard.

To ensure the first trade would be a success, the team spent the platform’s 18-month rollout period writing 70,000 lines of code, testing beta versions of the product, completing thousands of practice book builds, and inviting the platform to be hacked so that potential weaknesses could be spotted and rectified. They also got three EMS vendors on board: FlexTrade, Portware, and TS Imagine.

With the way watchlists are currently used, I’d say 90% are never actioned on

Brian Guckian

It wasn’t until August 2022 that the Appital team saw the first trade on its new platform. They were joined virtually by 28 other people, including representatives from Norges Bank (which made the trade), Turquoise, AllianceBernstein, the three EMS vendors, and heads of buy-side firms.

“We saw the deal originating, and then we observed it instantaneously executed on an exchange. We watched the trade happen on Bloomberg—we saw the print go up. For all of that to happen within 0.1 seconds is pretty cool, because at the moment, that process takes hours,” says Badyra.

“It was a relief—the fireworks did go off,” says Guckian. “Suddenly, the dialogue changed. We’d been selling this concept for years, and now we had moved it into reality. The hard work starts now.”

Early days

Appital is currently onboarding 40 clients and is in the process of implementing the platform within their systems, many of which are asset managers. The more uptake they get, the more liquidity users will be able to source. “This marks the beginning of our efforts to expand that universe of potential distribution, which will increase the amount of opportunity for all asset managers on the platform as well,” says Badyra.

Appital will also aim to attract more EMS players so that more traders can access their platform, a process that would be facilitated by their standardized API designed to integrate with new EMSs. Guckian says he is confident that traders and EMS vendors will recognize the potential in Appital’s technology.

“With the way watchlists are currently used, I’d say 90% are never actioned on. People are waiting for incomings to arrive, and then the information is never given to the brokerage community. It sits there on the buy-side desk. We’re trying to digitize and unlock that latent liquidity. Nobody has ever managed to successfully do that,” says Guckian.

Another edge Appital hopes it has over block venues and liquidity providers is that it doesn’t rely on one-vs.-one matching. Rather than executing trades only when a buyer and a seller for any given share are present at precisely the same time, Appital allows asset managers to enter their watchlist into the platform so that multiple participants could theoretically be found for some trades. This allows Appital to execute orders larger than five days’ ADV, including in illiquid small and mid-cap stocks.

For the future, Appital will likely look to expand its horizons.

“We have our hands full at the moment: Our launch is for European asset managers,” Badyra says. “But the idea of illiquidity is global, in that markets within the US are illiquid in some respects, and exchanges within emerging economies are illiquid. There is certainly a use case to take this global. We will have to see how it plays out if we do that, but that would be a logical next step for us.”