BlackRock Inc. (BLK), the world’s largest money manager, plans to start a bond-trading system that will allow investors to bypass investment banks.
The firm, based in New York, will match clients’ orders using its own system, rather than relying on Wall Street firms or other electronic networks to trade bonds. The platform could shut off a source of revenue for investment banks, which have seen fees from trading bonds for money managers decline amid interest rates near record lows and concern about a sovereign default in Europe.
“This is an extension of BlackRock’s broader efforts to streamline trading and access liquidity across various means,” BlackRock said in an e-mailed statement today, declining to give further details.
Chief Executive Officer Laurence D. Fink, who made BlackRock the world’s largest fixed-income manager with the 2009 acquisition of Barclays Global Investors, is seeking ways to lower costs for clients by leveraging his firm’s $3.51 trillion in assets. BlackRock began a separate program in 2010 that enabled clients to acquire chunks of debt directly from issuers through a capital-markets unit.
Corporate and sovereign-bond deals around the world generated a total of $13.6 billion in fees for bankers, down from $14.9 billion in 2010, according to data compiled for Bloomberg Markets’ ranking of the best-paid investment banks.
“BlackRock will always explore options to lower costs of trading to their customers,” Macrae Sykes, an analyst with Gabelli & Co. in Rye, New York, said in a telephone interview today. “This is one avenue for doing that, but it’s important to maintain the relationship with the Street as well, because they’re part of the marketplace.”
The service is open to clients who use BlackRock Solutions’ Aladdin investment-management system. BlackRock Solutions, the unit that advises financial institutions and governments on hard-to-value-assets, was selected by the U.S. in 2008 to oversee tainted holdings at the peak of the financial crisis.
Investors are seeking to cut transaction costs on fixed- income trades as yields on 10-year Treasuries (USGG10YR) touched record lows last year and those of investment-grade corporate bonds fell to their lowest levels ever last month. The Federal Reserve has kept borrowing costs near zero since December 2008, and said in January that economic conditions may warrant “exceptionally low” interest rates through 2014.
Two of the Fed’s top policy makers, Janet Yellen and William C. Dudley, endorsed the view yesterday that rates are likely to stay low through late 2014 as the Fed misses its goal for full employment and inflation remains in check.
“Given that trading costs can significantly reduce investment returns, this move could ultimately improve net returns for the clients and thereby strengthen BlackRock’s competitive position,” Andrey Golubov, who teaches at Cass Business School at City University London, said today in an interview.
BlackRock had about $1.2 trillion in bond assets as of Dec. 31, according to company filings. Pacific Investment Management Co. has about $1 trillion in bond assets, according to the Newport Beach, California-based firm.
BlackRock’s new platform would allow 46 clients to trade corporate bonds, mortgage securities and other assets, according to the Wall Street Journal, which reported the plan earlier today. Customers would include sovereign-wealth funds, insurance companies and other money managers, the newspaper said.
Clients who use Aladdin will have to pay a fee to get access to BlackRock’s trading network. The firm is awaiting approval from the Securities and Exchange Commission for its trading platform.
MarketAxess Holdings Inc. (MKTX)’s electronic trading system for U.S. and European investment-grade, emerging markets and other types of bonds said earlier this month that it had a record $58.7 billion of transactions during March. Other electronic trading systems for fixed income include Tradeweb Markets LLC and Bloomberg LP, the parent company of Bloomberg News, which also provides news and information to the financial community.