Inside BlackRock's Buy-Side Bond Platform

BlackRock, the world's largest money manager, is planning to launch an electronic bond trading platform to cross trades with other money managers that are its clients, possibly bypassing Wall Street intermediaries, according to today's Wall Street Journal.

The new trading hub would be run by the company's technology arm, BlackRock Solutions based in New York, and offer the firm's 46 clients the ability to trade corporate bonds, mortgage securities and other assets.

The move to set up an independent buy-side crossing system for bonds is perceived as being threatening to Wall Street firms since they are the primary market makers and liquidity providers in bonds.

This is occurring at a time when investment banks are facing a profits squeeze as they are being forced to comply with new regulations to curtail risk as a result of the financial crisis.

In the Journal article BlackRock's Street Shortcut, the firm's top trading executive said the move is designed to reduce costs and commissions, and not to disintermediate bond dealers.

"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 savings available to clients, we want to give it to them."

Since BlackRock is such a huge player in stock, bond and other asset classes across some 10,000 mutual funds, hedge funds and separate accounts it manages, such a system could drain a large source of revenues for investment banks.

The news was alluded to in January at a Tabb Forum fixed income conference in New York where Prager was interviewed by Lee Olesky, CEO of Tradeweb, an electronic bond trading platform where the buy side submit submit requests for quote to the sell side. In that interview, Prager said, "We have a crossing initiative going on. If you are sitting around with 3,000 fixed income accounts, you should see what they can do for you before you go outside."

Prager also pointed to "exogenous factors" and cited Dodd-Frank, The Volcker Rule and Basel III, as regulations that have required the sell side to put aside more risk capital and to exit the proprietary trading business, all of which has dampened their ability to hold inventory in corporate bonds and other fixed income securities.

Interestingly, BlackRock's new platform is tentatively called Aladdin Trading Network, named after the firm's Aladdin investment management system, so it may have brand awareness among the institutional investment community. BlackRock's staff is said to have begun approaching money managers about signing up to use the platform and has formed an advisory group of six to eight clients to work on the project, according to the Journal. The firm is also seeking approval from the SEC to launch the platform.

AT Analysis

But the big question is whether money managers will post their bids and offers on a screen for their peers to see. Asset managers tend to want anonymity and behave passively. If they cut out the sell side, will BlackRock make markets? On the other hand, BlackRock may give the sell side the opportunity to quote on the system, the WSJ article reported.

This is also significant because it's the first major initiative by an asset management to set up its own fixed income trading venture. Virtually all of the other electronic trading platforms, such as Tradeweb and MarketAxess, began with investment capital from the Wall Street dealers. If BlackRock is successful, it could potentially form its own consortium of money managers and offer the buy side the opportunity or incentive to own a stake in the venture.

Or perhaps, this could turn into the BlackRock Exchange. While this is complete conjecture, given the firm's size and global reach, anything is possible.