BlackRock ETFs Gain as Fixed-Income Liquidity Slides, Fink Says

BlackRock Inc., the world’s largest asset manager, stands to benefit as banks shrink their market-making role in over-the-counter fixed-income trading, Chief Executive Officer Larry Fink said.

Higher bid-ask spreads raise the cost of trading and thus increase the appeal of BlackRock’s exchange-traded funds, said Fink, speaking with Deutsche Bank AG’s co-CEO Anshu Jain on stage at a conference in New York hosted by the German company. BlackRock is the biggest provider of ETFs.

“We are seeing more and more plans now coming to BlackRock and saying we can’t live with the trading costs of our fixed-income portfolio, we can’t live with the lack of liquidity we have in our fixed-income portfolios and we can’t live with the operational task of managing thousands of securities,” Fink said. New York-based BlackRock has responded by converting those holdings into tailored ETFs, he said.

In the wake of the financial crisis, global regulators required banks to back a greater portion of their fixed-income assets with equity to absorb losses. That change, and a U.S. law that restricts proprietary trading, made those firms less willing to hold debt securities as some bond trades became slower and more expensive.

“I’m actually pretty calm about it; I think Wall Street will continue to be there when it’s profitable for them,” Fink said. “You will be there when it’s profitable for you, and if it’s not profitable you’re going to pull back.”

Automated Trading

Fink, 60, said he expects more trading to be done over computer networks and exchanges. BlackRock last year announced plans to start a bond-trading system called the Aladdin Trading Network. The effort failed to attract enough customers, and BlackRock said in April that it would route trades instead through MarketAxess Holdings Inc.’s electronic system.

Bid-ask spreads, the gap between what Wall Street banks will pay to buy a bond and what they’ll sell it for, widen when bonds are perceived to be riskier or harder to trade. Wider spreads increase trading costs for an actively managed bond fund and reduce investment returns.

Higher trading expenses will mean “a change for everyone,” including BlackRock, Fink said. “We’re in a better position for that through ETFs.”

The ETF business is already reshaping Wall Street, Fink said.

“There’s a whole cottage industry of investment firms, and we see many of them, they were nowhere a few years ago, some of them eight to 12 billion dollars in assets, and all they do is trade ETFs,” he said. “That is probably the fastest-growing component of the investment-management business.”

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