BlackRock Trading Venture Leaves Questions

NEW YORK (TheStreet) - BlackRock Inc. ( BLK)'s bid to take trading business from Wall Street appears to have faced some setbacks, and many questions remain about what exactly the world's largest money manager is planning and what it hopes to accomplish.

BlackRock, scheduled to report first-quarter earnings before the market opens on Wednesday, has been working since at least 2009 on a global trading platform that will allow its clients and other money managers to trade with each other, rather than going through securities dealers like Goldman Sachs ( GS) or JPMorgan Chase ( JPM).

The much-anticipated trading platform, a potentially game-changing venture that threatens to put BlackRock in direct competition with Wall Street, got some fresh attention last week from a pair of news reports. Still, recent statements BlackRock has made about the trading platform, which it says it expects to call the Aladdin Trading Network, are somewhat puzzling.

The Aladdin Trading Network (ATN), is a response to an environment in which Wall Street banks are putting less capital at risk to support trading activity.

Primary dealer corporate bond inventories are some 80% off their highs of $235 billion in 2007, according to Federal Reserve data.

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That creates a real problem for investors like BlackRock and other bond managers. BlackRock also argues "trading costs remain too high for certain types of securities," according to spokesman Brian Beades.

But there has been turnover at the top of BlackRock's trading initiative and mixed signals as it has been developed.

Minder Cheng, the executive from Barclays Global Investors who was originally tasked with developing ATN, quietly left BlackRock in July 2010. Beades declined to discuss Cheng's departure and Cheng did not respond to an email message asking about it.

The platform also looks to have faced some delays. BlackRock CEO and Chairman Larry Fink said in a January 2011 earnings call it would be up and running by the second half end of 2011. A year later, however, he seemed almost to back away from the plan.

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"My greatest hope is that we don't have to do this, that the liquidity in Wall Street is greater than ever before, the bid-ask spread is tighter than ever before, and I'm spending a lot of money for nothing," Fink told investors during a Jan. 19 conference call this year.

The Wall Street Journal reported last week that BlackRock already conducts 3% of its trades internally, which spokesman Beades attributed to "work on the platform to date."

But that 3% of trades consists of BlackRock portfolio managers trading with each other, a practice known as "crossing." Barclays Global Investors, which BlackRock acquired in 2007, already had this capability for equities.

BlackRock hopes to increase that total to 6%-8%. Beades writes that ATN "expands on the concept of crossing being performed today by opening up the opportunity to other buy-side firms who utilize BlackRock Solutions' Aladdin investment management platform."

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That idea--that BlackRock would trade securities with other institutional investors rather than by going through a securities dealer--is a different kettle of fish than simply crossing trades.

However, in his public comments about the platform, Fink has never made a distinction between crossing trades internally and bringing other big money managers (what Beades refers to when he mentions "buy-side firms") into the mix.

The latter idea faces skepticism, as it isn't clear that other institutional investors will be eager to send business to a competitor like BlackRock.

"Already several dealer consortium and broker neutral venues have tried to compete and failed to-date, we haven't yet seen a significant buy-side venue attempt or succeed," wrote analysts at Keefe, Bruyette & Woods (KBW), assessing the competitive threat to electronic bond trading platform MarketAxess ( MKTX).

More interesting, of course, is the threat BlackRock may represent to giant securities dealers.

In January of this year, for example, on the same call that Fink made the odd comment that he is "spending a lot of money for nothing," he added that "this is not meant to be - we're not meant to be us becoming a broker-dealer and competing with Wall Street."

And yet that is exactly what BlackRock is doing, according to the Financial Times, which reported Friday that BlackRock has applied to the Securities and Exchange Commission for broker-dealer status.

Responding to the recent reports, Moody's Investors Service wrote on Monday that BlackRock's platform "is credit negative for banks with global capital market operations as it has the potential to reduce their trading revenues."

Moody's cited Goldman, Deutsche Bank ( DB) and Barclays PLC ( BCS) as particularly vulnerable to the threat from BlackRock since they rely heavily on fixed income trading revenues.

Moody's nonetheless noted BlackRock's proposed platform would face "a number of difficulties, since it aims to match buyers and sellers on relatively illiquid markets."

If BlackRock can overcome some of these obstacles, however, it may find encouragement from regulators to launch its plan.

Michael Barr, a University of Michigan law school professor who was the U.S. Treasury's Assistant Secretary for Financial Institutions from 2009-2010, sees BlackRock's venture into securities dealing as a healthy development.

"The more those kinds of players can introduce competition into the broker dealer space and derivatives markets and bond markets and the like, the better off the financial system is. More competition will help to bring down spreads and improve price transparency," he says.

-- Written by Dan Freed in New York.

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