Barclays Commits Capital to Clients Through Self-Serve Algorithm

Barclays Plc is expanding the ways institutions can trade shares electronically by enabling them to draw on the bank’s capital to complete orders.

The lender will allow some of its preferred clients funneling orders into the market through automated algorithms to stop trading at a certain point and instead use the bank’s money to execute the remaining shares and avoid excessive price moves, according to Joseph Corcoran, New York-based global head of equities at Barclays.

The initiative comes as banks, facing three years of declining equities volume in the U.S., seek new products and more-efficient services to attract clients and trading. The London-based firm, which has expanded its electronic trading business globally in recent years, introduced a new service in December that allows mutual funds and institutions to seek block trades from other Barclays clients.

“The initial innovation of algorithms was to go faster and cheaper,” Corcoran, 44, who oversees about 1,500 people globally, said in an interview. “We’re taking other areas of our expertise like capital commitment and portfolio management and marrying those through this product. It allows clients to recapture some of the price impact they’d otherwise have on the marketplace. They can decide if this is right for them and just give us the position.”

Buy or sell orders from institutional investors may influence the price of securities if they overwhelm supply or demand in the market. Brokerages use computer algorithms to limit that effect by trading shares over a period of time and seeking the best-possible average price for clients. The new service from Barclays will allow the bank to use its own cash to buy some of the shares a client is selling, or sell stock to meet buy interest.

Changing Roles

Traditional equities trading desks at some of the largest banks are changing. Credit Suisse Group AG, Switzerland’s second-biggest bank by assets, last year merged its stock sales and trading unit with its electronic equities-trading business and gave responsibility for the combined group to Dan Mathisson, who ran the electronic side.

The historic value of a block desk is that a trader at the bank has discreet conversations with potential counterparties on the client’s behalf so the institution can execute larger orders, Bruce Weber, dean of the Alfred Lerner College of Business and Economics at the University of Delaware, said by phone. The bank could also commit capital, he said. A block trade is an order of at least 10,000 shares or $200,000 in market value.

Brokerage ‘Menu’

“What you see now is the main brokerage firms give their customers a menu,” he said. “If you want high touch, you pay a higher commission. If you want a low commission, you go low-touch with electronic tools, and they say you can’t tie up their expensive analysts and traders for much time. Increasingly they now have teams of people who are not there to handle individual buy and sell orders but to help customers use the tools.”

Barclays is augmenting its ability to service asset managers, brokers, retail securities firms and traders who buy and sell baskets of stocks by drawing on its distribution network and experience managing risk in positions across trading desks and products, Corcoran said. The equities division he oversees includes stocks and derivatives, program trading, convertibles and risk management.

‘One Platform’

The bank aims to boost its value to clients by integrating traditional trading services such as capital commitment into electronic tools and giving individuals on so-called high-touch desks who handle blocks more quantitative and electronic capabilities, said Corcoran, who joined Barclays in 2008 and earlier was head of equities trading for the Americas at Lehman Brothers Holdings Inc. He started at Lehman in 1990 as an analyst in equity derivatives.

“Many organizations talk about tying high touch and electronic together,” he said. “The reality is it’s really one platform from a risk perspective. We look at risk across a wide continuum. We don’t see a difference in managing it.”

The capital-commitment feature in algorithms, which will be available to European clients by mid-year, is an example of that convergence. In that case the customer has already decided to trade electronically and Barclays is offering capital to curb the risk of price moves, Corcoran said. Clients authorized to use the feature must check a box specifying the percentage of the order to be transferred to the bank before they start using an algorithm. The maximum percentage depends on Barclays’s relationship with the firm.

Hedging Risk

Barclays hedges positions acquired this way as part of the larger group of holdings it manages across the equities business, Bill White, global head of equities electronic trading, said in an interview. The bank has a maximum level of financial exposure it accepts per order and will immediately tell a client if their order isn’t eligible for any reason. The feature can also be disabled if necessary, he said.

The offering is available for stocks in which Barclays is a market maker. The firm runs the largest designated market-maker group on the New York Stock Exchange, representing almost 1,200 companies, or 36 percent of the total, according to data from NYSE Euronext. It makes markets in about 4,000 securities.

New quantitative and analytical tools for traditional cash-equities traders also enable Barclays to reduce risks it faces when pricing a block of shares for a customer and liquidating the position as part of a portfolio created by facilitating customer transactions, Corcoran said. Knowing how each position affects the bank’s holdings enables individual traders to handle larger trades for clients and provide better prices, he said.

Fragmented Market

U.S. trading has fragmented over the last decade across more than 50 exchanges and other platforms including dark pools or private broker-run venues that execute shares without displaying prices in advance. One outcome is that a new kind of market expertise has become critical in the last few years, Corcoran said. The bank’s knowledge about market structure and what’s called “liquidity capture,” or the ability to find orders to complete trades, comes from White’s team.

Understanding the rules that determine how trades occur on public exchanges, the likely market impact of buying or selling a block gradually, and the fees and rebates exchanges impose on brokers is increasingly important, said White, who is also the IT strategist for the bank’s equities cash business. These factors affect calculations about how many shares can be bought and sold electronically, how quickly and at what average price.

Cost Cuts

Barclays will cut 3,700 jobs to reduce annual costs by 1.7 billion pounds ($2.6 billion) this year, the company said on Feb. 12. Chief Executive Officer Antony Jenkins is cutting costs and eliminating jobs to return the lender to profit, while trying to avoid regulatory missteps such as the 290 million-pound fine in June for rigging the London interbank offered rate that prompted Robert Diamond, his predecessor, to resign.

Corcoran declined to speculate on whether his division is likely to see a headcount increase or reduction this year.

The lender posted a net loss of 1.04 billion pounds for 2012, its first in two decades, as it set aside an additional 1 billion pounds in the fourth quarter for compensating clients wrongly sold interest-rate swaps and loan-repayment insurance. The bank said on March 8 that it awarded 428 workers more than 1 million pounds in 2012, down from 473 a year earlier.

Dark Pool

As part of broader changes made to its equities group, Barclays has centralized its trading business and pipes more orders through its dark pool, called LX for Liquidity Cross. The venue displaced one owned by Goldman Sachs Group Inc. in January to become the second-largest in the U.S., according to data compiled by Rosenblatt Securities Inc.

LX slipped to the number-three spot in February while maintaining 1.4 percent of total U.S. equities volume, or an average of 92 million shares a day, a Rosenblatt report dated March 25 showed.

Barclays is now seeking mutual-fund and hedge-fund clients smaller than those it has traditionally pursued to increase the flow of orders into the pool, Corcoran said. Offering execution services to those firms isn’t costly since the bank already conducts that business, and more institutions submitting orders to LX will boost the likelihood of trades for all customers, he said.

Smaller Clients

’’We’re tapping into clients we hadn’t tapped before,’’ Corcoran said. ’’They’re smaller than our minimum hurdle would normally be,’’ he said, without specifying that level.

The largest dark pool since mid-2009 has been Credit Suisse’s Crossfinder, which accounted for 1.9 percent of U.S. activity in February, Rosenblatt said. Trading in the 19 venues tracked by the broker was 14.3 percent of U.S. volume that month, the company said.

Barclays provides what it calls toxicity reports to clients as part of its monitoring of activity within LX. Beyond showing how the bank assesses participants to help ensure that traders in the pool aren’t adversely affecting orders from others, the reports allow customers to adjust the types of buy or sell requests they trade with, White said. Better understanding of how participants trade has helped drive LX’s growth, he said.

Barclays in December began letting about 200 clients decide how and when to seek potential counterparties for blocks among other customers using its DirectEx service. Mutual funds and institutions can send electronic messages called indications of interest or IOIs to other clients on the DirectEx network or allow the bank to automatically select who should get them, said Eric Johnston, head of Americas cash equities trading.

Block Trades

Customers can post and access the IOIs through Bloomberg LP, the parent of Bloomberg News, or their own so-called order management system, giving them more control over block trades. The IOIs can be traded immediately.

The bank finds out about clients’ IOIs only if they lead to an execution, Johnston said. A Barclays trader then calls both parties to see if they’re interested in negotiating a larger share deal, he said. He declined to say how many trades take place daily on average through the service.

Barclays is now in the final stages of creating a single global trading-related services platform for clients. Operating one technology platform with regional differences instead of separate systems makes it easier to roll out new products and simpler for customers to use, Corcoran said. They can access products the same way from one country to another, he said.

“If it’s just technology and speed, that’s a commodity,” he said about offering institutions an equities platform. “It’s about how you give clients something they can’t do, whether it’s being able to manage risks or provide research or other content. We have a distribution network and risk-taking appetite and the acumen and skillset to do that.”

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