BlackRock’s Latest Fix for Bond Trading Is Circumventing Banks

Photographer: Craig Warga/Bloomberg

BlackRock Inc. is muscling into trading venues that had long been the exclusive territory of big banks as the world’s biggest asset manager seeks to make up for declining liquidity in the bond market.

BlackRock revealed last week that it’s now trading bonds directly with inter-dealer brokers, following years of warning that liquidity is waning. In September, BlackRock said the corporate bond market is “broken.”

Banks have long facilitated the business, but regulations passed after the 2008 crisis hobbled their ability to do so. By trading with inter-dealer brokers -- an industry that includes ICAP Plc and Tullett Prebon Plc -- BlackRock is circumventing a middleman.

Money managers are “looking to get liquidity anywhere they can get it, and the other side is the inter-dealer brokers -- their business model has been totally turned upside down,” Kevin McPartland, head of research for market structure and technology at Greenwich Associates, said in a phone interview.

Tara McDonnell, a spokeswoman for New York-based BlackRock, declined to comment.

A large investor trading directly with inter-dealer brokers marks a sea change for Wall Street, where big bond trades traditionally are executed between asset managers and large banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc. Trading venues run by ICAP and Tullett Prebon, meanwhile, have historically brokered trades between banks and stayed clear of interacting directly with buy-side investors such as BlackRock.

More Liquidity

In its report, BlackRock explained its participation in inter-dealer venues by noting banks’ retrenchment from fixed-income trading and the need to tap alternative sources of liquidity in the market.

Inter-dealer banks have faced their own challenges coping with the shift to electronic trading, which has undermined their conventional business of negotiating transactions over the phone. It makes sense to let other firms like BlackRock in, McPartland said. But they have to do so “without completely upsetting the bank clients who have been their sole focus for the last however many decades,” he said.

David Weiss, senior analyst with Aite Group LLC, said banks were unlikely to protest BlackRock’s move since they would be reluctant to anger an important client.

“This isn’t just any investor, this is BlackRock,” he said. “What’s interesting is, in all likelihood, the banks said, ‘OK. Maybe one of the reasons is that all the banks do business -- or very much want to -- with BlackRock anyway.’”

BlackRock’s decision illustrates the growing power of the buyside on Wall Street, where large asset managers snap up large portions of new bond deals and account for more fixed-income trading as banks retrench.

“There’s an inevitability to this given that unlike any other asset class, you have some very, very, very dominant buyside players,” said Robert Smith, who is the chief investment officer at Sage Advisory Services Ltd. “Those are the tails that are going to wag the dog.”

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