Demystify Stock IOI
What is Equities stock IOI (Indication of Interest)?
Type IOIA in Bloomberg. It is a way for brokers to advertise its block liquidity out.
There are two types of IOI:
1) Market making IOI
Broker Dealer (BD) think they have alpha on a stock, so they actively want risk even they don’t hold underlying stocks. When market is in momentum or contrarian, BD take opposite side and expect holding risk overnight to reduce loss. When market is in volatility, they expect market revert back soon. In general, BD create market making IOIs for each client on stocks they think they have alpha. Be cautious about market making IOIs, because it may lead adverse selection since BD generate this kind of IOIs based on your past trading history and trading pattern only when they think they have alpha on you.
2) House Natural
BD can only send out house natural IOIs if they hold underlying position on a stock. You want natural IOI because it reduce market impact since you are essentially match a bona fide trade on the other side.
Take away: Try to stay away from market making IOIs because of adverse selection. Inspect natural liquidity instead.
If you want to learn more about Equities stock IOI, try read this article
Lies, Damned Lies and IOIs? By TabbFORUM
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