BlackRock, the world’s largest money manager, is planning to become an exchange operator.
Only the electronic trading venue it will develop and run will not deal in stocks. Its focus will be bonds.
The move will let BlackRock and other asset managers “bypass Wall Street and trade bonds directly with one another,’’ according to a report Wednesday evening on the web site of the Wall Street Journal.
The move also could create a significant new source of revenue for the investment banks involved, at a time when stock trading is at a five-year low and capital markets of all types are in the doldrums (See, “Are Stocks' Days Numbered? The Stats “).
The company’s BlackRock Solutions technology unit would operate the bond trading platform, according to the Journal. Roughly 45 sovereign-wealth funds, insurance companies and other money managers would get to trade in corporate bonds, mortgage securities and other assets. BlackRock, which also oversees about $3.5 trillion in assets, also would use the electronic trading service.
BlackRock Solutions would charge a small fee for the service, undercutting fees charged by Wall Street dealers in bonds.
BlackRock representatives have begun to approach money managers about signing on to the platform, the Journal said, which will be named Aladdin Trading Network.
The name is derived for the system built in-house by BlackRock over the last two decades to provide itself with sufficient detail on the underlying components of fixed-income securities so that it could trade confidently in them.
The company, at the time, found that it had to piece data together from multiple sources "to find the best components of a certain security's attributes," Tom Fortin, the chief information officer at BlackRock, told Securities Technology Monitor.
Getting the data right and creating the right model for each new financial instrument that comes along in Aladdin is what BlackRock has made a foundation of its integrated system for analyzing investment strategies and executing the trades it needs to produce results.
The first product that BlackRock sought to understand was a set of instruments that came to be known as collateralized mortgage obligations. These are bonds sold by a firm that is the legal owner of a set of mortgages and buyers receive payments according to a defined set of rules. The mortgages that underlie the payments are the collateral.
This was long before such “structured” debt instruments became the kinds of “weapons of mass destruction,” as investor Warren Buffett put it, that resulted in a global financial crisis when large amounts of “securitized” debt and swapping of credit risks imploded in 2007 and 2008.
BlackRock has sought to capitalize on Aladdin before.
In 2001, for instance, BlackRock made its first installation of Aladdin for a customer that also manages assets: Barclays Global Investors. Eight years later, BlackRock bought Barclays for $15.2 billion in cash and stock. This was the move that earned it the ability to call itself the world's largest asset supervisor, now with $3.5 trillion under management.
In March 2011, BlackRock said it planned to expand its operations in Japan and Asia, in a partnership with Mizuho Financial Group. Mizuho, which includes Mizuho Bank, Mizuho Corporate Bank, Mizuho Trust & Banking and two securities firms, has $1.4 trillion under its management.
As part of the alliance, Mizuho said it was considering adopting Aladdin, as its own investment management system.
To get the right data, BlackRock has deep relationships with some of the largest reference data and pricing vendors in the world. Aladdin is hooked into dozens, if not hundreds, of data streams, from vendors, Fortin said. And BlackRock works with suppliers to help identify weaknesses in their services and get the data as perfect as possible.
In structured products, like CMOs, you have to get detailed sets of data for the underlying collateral. To see, for instance, rates of delinquency or prepayment of mortgages.
BlackRock pulls in reference data on all forms of financial instruments, from fixed-income products to stocks to derivatives to futures, options and floating rate instruments.
Aladdin, in effect, captures data on "virtually everything that's moving in the financial markets," Fortin said.
BlackRock is not the only outfit trying to lower costs of trading bonds through an electronic platform.
The Bonds.com Group in New York operates an online trading platform for fixed income securities called BondsPro.
BondsPRO provides more than 70 thousand live prices on 10 thousand different issues from more than 300 contributing counterparties.
BondsPRO posts live, anonymous, negotiable orders on a single bond or list basis, and permits price negotiation - executing global corporate fixed income efficiency trades on behalf of professional traders.
Bonds.com Group said late last year that it raised $16.6 million from a group of investors that includes an entrepreneur that created the first hedge fund in Beirut, Lebanon.
That was Michel Daher, chairman of Daher Bonds Investment.
Other investors in the round include Mida Holdings, Oak Investment Partners, and GFINet Inc.
The average ticket on a bond transaction on BondsPro is $81. The platform has one backer so far among investment banks, UBS.
The chief executive of BondsPro, George O’Krepkie, came from a much larger electronic trading platform company, MarketAxess Holdings.
MarketAxess a decade ago created a single platform for trading electronically across many types of corporate bonds, emerging-market bonds and credit-default swaps, may be on the verge of selling itself.
The MarketAxess platform takes competitive bids through more than 80 broker-dealers around the globe, on bonds of various types being offered by roughly 800 institutions.
The firm was founded by Bear Stearns, Chase Manhattan and J.P. Morgan. ABN Amro Bank NV, Credit Suisse Group AG, Deutsche Bank AG, Lehman Brothers and UBS AG later made equity investments in MarketAxess.
J.P. Morgan Asset Management Holdings Inc. holds a 17.5% stake.
For March 2012, MarketAxess said it handled $58.7 billion of trading volume in bonds, consisting of $36.6 billion in U.S. high-grade bonds, $5.1 billion in eurobonds, and $17.0 billion in other bonds.
Tom Steinert-Threlkeld writes for Securities Technology Monitor.