Aladdin Trading Network

What are you planning to buy from BlackRock? They have bonds for you:

BlackRock Inc. is planning to launch a trading platform this year that would let the world’s largest money manager and its peers bypass Wall Street and trade bonds directly with one another. … The trading platform would be run by the New York-based company’s BlackRock Solutions arm and offer 46 clients—including sovereign-wealth funds, insurance companies and other money managers—the ability to trade in corporate bonds, mortgage securities and other assets, company executives say.

Under the plan, the platform would seek to match buyers and sellers of the same securities, in a process known as “crossing trades.” BlackRock Solutions would charge a small fee for the service that would be much lower than Wall Street’s trading commissions.

Some of the transactions would effectively cut out the Wall Street dealers that have long acted as middlemen in the credit markets. BlackRock’s asset business, which oversees $3.5 trillion, would also use the platform.

So why wouldn’t you use this thing, whose working title is “Aladdin Trading Network”?* It’s pretty tautological that if you can cross a bond with another investor at a price that, with BlackRock’s small fee, is inside the market that you can get from dealers, you should do that. And presumably BlackRock’s $3.5 trillion AUM, plus whatever its clients post on this platform, provides a good opportunity for crossing. And from the Journal article there seems to be plenty of low-hanging fruit, e.g. BlackRock’s own funds only cross about 3% of their trades and are aiming to move that to 6-8%, so presumably that is possible in the basic sense that 6-8% of its trades are matchable with each other, so in a perfect-information world it’s kind of weird they’re not matching those already.

Of course the answer to why you wouldn’t use this is that there are so many bonds each of which is special in its own way, and you have your little heart set on a particular bond that is green with pink polka-dots and will accept no substitutes, and BlackRock either doesn’t have the one you covet or doesn’t want to part with it and neither do the 46 other folks on the system and so you have no choice but to source it from a dealer who will charge you a big nasty spread. Actually BlackRock will facilitate that for you too, which is perhaps a clue about how robust the matching will be: Read more »