Institutional traders are constantly in pursuit of places to execute at the best possible prices for their clients, without exposing their strategy or giving up liquidity. The latest contender is BlackRock, the world’s largest money manager, which expects to launch an internal trading platform this year. With $3.4 trillion in assets under management, BlackRock can certainly afford to take on the high costs and complexity of developing its own trading environment. But what’s really behind the firm’s desire to expand its trading business?
It is more likely that BlackRock is looking to provide its vast client base with a suite of services that will give them no reason to ever leave the ranch. Imagine the economies of scale BlackRock will reap for the firm’s investment and risk management services. And what CIO couldn’t use custom-built algorithms and structured products proffered as part of a long term, trusted relationship. Now add to possibly derivatives clearing, and ridding the headache of real time compliance and reporting and you’ve got the institutional equivalent of golden handcuffs.
With the BlackRock Solutions unit maintaining over 500,000 positions on its Aladdin closed trading system, order flow for crossing with clients’ trades internally should not be a problem. And the benefits include concealing their trading intentions from a public exchange, thus avoiding market impact on their portfolios, cutting the cost of going through broker/dealers and perhaps saving some transaction fees, depending on the firm’s business model. But more importantly BlackRock could use the new platform to protect its clients in much larger ways.
Whether BlackRock wants more trades in order to detect activity in dark pools remains to be seen. They might link their network to others or simply use the orders to test the dark pools for price information, returning to their own system to actually execute the trades. But BlackRock also has an advantage in that it doesn’t need a traditional exchange system to operate. “Internalization is a permitted activity under the new Market 2000 or Reg NMS Rules,” notes Allan Grody founder of NY-based Financial InterGroup.
Will BlackRock run the platform as an asset manager or under its brokerage umbrella? Will they take the crossing engine they have and open it up to the other crossing networks to maximize their order flow? Certainly there is money to be made just in the order flow itself. “I don’t know what Black Rock is planning to do,” says Grody, who also lectures at NYU’s Stern Graduate School of Business. “But these crossing networks are almost like an internalization process within an existing firm, where they take their order flow before sending an order out to market to fight against the other orders to discover the price.”
Perhaps the most revealing of BlackRock’s long-term intentions is in the company’s new hires. BlackRock’s Aladdin Solutions Center, which will build and run the platform, is interviewing for “Solution Center Analysts,” who will administer client requests and provide a variety of tools and services to large institutional investors and set up “key client specific data within Aladdin,” as part of a mission to provide “the best risk analytics and investment management platform” with a “robust compliance engine” for BlackRock’s proprietary Trading System. Risk analytics? Compliance? Investment management platform? That could be golden handcuffs you hear jangling.
