01.24.2012
By Terry Flanagan

Self Reliant Buy-Side a Go?

As broker-dealers and banks are upon their era of change, so may their customers.

To no surprise, regulation ensuing from the Dodd-Frank Act, Basel III, among other new rules will curtail the power of broker dealers. Raised costs for sell-side firms may be materializing in their everyday business with their buy-side counterparts. Once thought an essential part of Wall Street, broker dealers are finding themselves downsizing, with less liquidity and less opportunities.

As a result, buy-side giants, notably led by the world’s largest asset manager, BlackRock Global Investors, is ready to become a little bit more self sufficient with the launch of an internal trading platform—its own “dark pool”, in the latest initiative towards a reduced reliance on banks. With its 3.3 trillion under management, if pulled off, such a move may be made possible only at firms of BlackRock’s size due to their vast stock inventory.

However, while it may be inarguable that broker dealers at large may go through growing pains and changes, their livelihood may highly depend on specific asset classes. Not all buy-side firms are keen on internalizing their trading operations. Prudential Fixed Income Chief Investment Officer Michael Lillard told Institutional Investor that the importance of an independent broker dealer is central to price discovery and transparency. The firm has 327 billion under management. A Prudential spokesperson could not be reached for comment by press time.

Naturally, conflicts of interest may arise from an internal matching of trades. Moreover, instruments that trade OTC (over the counter) may still require brokers to gingerly make deals and find best prices by utilizing relationships—a sliver but steadfast institution for some players in today’s increasingly electronic world.

Fixed income has always been a part of BlackRock’s heritage. When the firm became independent from former private equity parent, Blackstone Group, it held entirely fixed income assets. Blackrock’s expertise in the area has propelled the firm to extend its trade internalization plans towards automating fixed income, as well.

A BlackRock spokesperson could not be reached for comment by press time.

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