Asset management giant BlackRock's confirmation of plans
to launch a crossing network in 2011 offers new scope for buy-side trading desks to add value to clients, but the initiative is only likely to be replicated by the largest institutions.
BlackRock has US$3.45 trillion of assets under management and has made substantial investments in its technology capabilities, largely through its BlackRock Solutions division, which provides risk management and advisory services.
As such, it has the resources and motivation to reduce trading costs by crossing internally opposing trades in the same stock rather than executing them separately via external brokerages.
“We are developing the technology in-house to offer better value by lowering trading costs,” BlackRock's president, Rob Kapito, told the Financial Times in on 28 December 2010.
Similar projects have been started up before, such as E-Crossnet, launched in 2000 by Merrill Lynch Investment Managers and Barclays Global Investors. A buy-side only crossing network, E-Crossnet failed to attract sufficient liquidity to support itself and was eventually bought by ITG in 2004 and integrated with the agency broker's POSIT dark pool.
The internal crossing network could be a significant differentiator if it enables BlackRock to pass on savings from lower trading costs to clients. But many practical issues, such as how BlackRock's traders decide when to cross internally and when to route trades via brokers, are yet to be finalised. One approach – similar to that used by the Blockcross system licenced in Europe by interdealer broker ICAP – would be for a matching engine to be linked directly to order and execution management systems to effect matches at a primary mid-point of the primary market.
BlackRock has not confirmed the geographic reach of the crossing network, but if it includes European stocks the firm may need to upgrade the best execution policy it is required under MiFID to issue to clients. Some policies name specific venues on which trades will be executed, while others make broader reference to execution destinations generically.
According to Guy Sears, director, wholesale at the Investment Management Association, the UK buy-side industry body, BlackRock”s sophisticated title transfer recording system, necessary for the administration of client trades, already provides many of the processed needed for an internal crossing network. The platform is informed by messages from brokers when trades have completed, notes title changes and then communicates these to custodians to effect the change of ownership in securities. “As long as the asset manager can generate the requisite electronic message and pass it to a custodian they can effect the requisite changes,” he said.
A spokesman for UK regulator the Financial Services Authority confirmed that there is no legal reason why a buy-side firm cannot operate a crossing network in Europe. But the attitude of regulators might change should the volume of trades executed on the BlackRock platform – and other similar systems if the firm's rivals follow suit – becomes so high as to hamper price formation in the public markets. Regulators and politicians in Europe have regularly raised concerns about a perceived increase in off-exchange trading in recent years. Early in 2010, the US Securities and Exchanges Commission proposed the introduction of a ”trade-at' rule to limit the migration of liquidity from lit to dark trading venues.