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BUSINESS
Updated April 12, 2012, 9:04 a.m. ET
BlackRock's Street Shortcut
Big Banks Would Be Bypassed With Bond Platform; 'Not
Going to Cannibalize'
By KIRSTEN GRIND And SERENA NG
BlackRock plans to launch a trading platform this year that would let the world's largest money
manager and its peers bypass Wall Street and trade bonds directly with one another. Kirsten
Grind reports on Markets Hub.
BlackRock Inc. is planning to launch a trading platform this year that would let the world's
largest money manager and its peers bypass Wall Street and trade bonds directly with one
another.
The electronic trading hub has the potential to reduce a lucrative revenue stream for investment
banks at a time when their businesses are being squeezed by lackluster markets and new
regulations put in place to curb risk in the aftermath of the financial crisis.
The trading platform would be run by the New York-based company's BlackRock Solutions arm
and offer 46 clients—including sovereign-wealth funds, insurance companies and other money
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managers—the ability to trade in corporate bonds, mortgage securities and other assets, company
executives say.
BlackRock is planning to launch a trading platform that would let the world's largest money
manager and its peers bypass Wall Street and trade bonds directly. Financial News's William
Hutchings assesses its impact on investment banking. Photo: Associated Press
Under the plan, the platform would seek to match buyers and sellers of the same securities, in a
process known as "crossing trades." BlackRock Solutions would charge a small fee for the
service that would be much lower than Wall Street's trading commissions.
Some of the transactions would effectively cut out the Wall Street dealers that have long acted as
middlemen in the credit markets. BlackRock's asset business, which oversees $3.5 trillion, would
also use the platform.
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BlackRock executives contend that the platform is aimed at lowering costs and plugging a gap in
Wall Street's diminished ability to provide market liquidity, not at competing with investment
banks.
"It's not going to cannibalize Wall Street," Richard Prager, a BlackRock managing director and
head of global trading, said in an interview. "If there's a savings available to clients, we want to
give it to them."
BlackRock Chief Executive Laurence D. Fink has long been a vocal critic of the way Wall Street
banks collect a large "spread," or price gap, between a bond's purchase and selling price, and has
sought to reduce costs for clients of his firm.
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Laurence Fink
The plans by BlackRock underline the structural changes taking place in the plumbing of
financial markets as new regulations aimed at curbing bank risk and tighter funding markets
reduce Wall Street's ability and resources to provide trading services to investors.
The trading inventories of corporate and mortgage bonds held by large dealers, mostly Wall
Street banks, have declined over 70% since 2007, which marked the beginning of the credit
crunch that preceded the financial crisis. Over this same period, corporate-bond issuance has
grown and the amount of assets held by the investment community has risen significantly.
BlackRock representatives have begun to approach money managers about signing on to the
platform and have formed an advisory group of six to eight of their BlackRock Solutions clients
to work on the initiative, which is tentatively called "Aladdin Trading Network," after the firm's
Aladdin investment-management system. Several of the clients in the advisory group also have
agreed to sign on to the new platform, according to the company.
The firm also has been in talks with Wall Street dealers, which may provide price quotes to the
system. The banks also could be called upon to respond to orders that can't be matched directly
between investment firms.
BlackRock is seeking approval from the Securities and Exchange Commission to launch the
platform. The company recently completed a test trade on the new platform and expects to
launch it by year's end. An SEC spokesman declined to comment.
Across Wall Street, BlackRock's plan is seen by investment bankers as controversial because of
its potential to reduce dealers' bond-trading revenues.
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Reuters
BlackRock executives contend that the platform is aimed at lowering costs and plugging a gap in
Wall Street's diminished ability to provide market liquidity, not at competing with investment
banks.
But BlackRock's sheer size makes it one of Wall Street's biggest customers, making it hard to
ignore. The funds it manages dole out billions of dollars in trading commissions and fees to
dealers each year, and BlackRock will likely continue to send a lot of business to Wall Street
even if the firm does some trades on its own platform.
Some bankers, however, are skeptical that BlackRock's new trading platform can attract
significant activity because there are thousands of different bonds and the likelihood that firms
will want to trade the same bonds at the same time may be relatively low. A bond issuer like
General Electric Co., for example, has dozens of different debt securities.
BlackRock also may face an uphill battle persuading clients to support the initiative, because
most money managers aren't accustomed to posting their bids and offers for others to see.
BlackRock is already trying to enhance its own ability to cross stocks, bonds and other trades
among the 10,000 portfolios of mutual funds, hedge funds and separate accounts it manages. In
late 2010 it stepped up efforts to let its funds trade stocks and bonds directly with each other. A
key goal was to save on trading commissions and fees that would otherwise go to brokerages and
Wall Street firms.
The money manager also recently set up a trading desk in Princeton, N.J., to handle small bond
trading orders for the accounts it manages. Bond orders of $2 million or less now are moved over
to the desk, where they are traded on various electronic platforms.
The company hopes to double the number of stock, bond, foreign exchange and other trades it
crosses internally to 6% to 8% of its trading volume from about 3% currently.
Write to Kirsten Grind at kirsten.grind@wsj.com and Serena Ng at serena.ng@wsj.com
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