Just because an investment firm is big doesn’t mean it poses more risk to the financial system, according to BlackRock. Rather than size, regulators should look at how much borrowed money a fund uses as a way to screen for systemic importance, it said in an April 4 letter to the Financial Stability Board. BlackRock said it uses very little leverage across its funds.
“The fact that some firms have gotten larger and some firms have gotten smaller, I’m not sure that’s relevant to secondary trading,” said Richard Prager, head of trading and liquidity strategies at BlackRock. “You have to think about it in terms of the different funds. It’s going to affect all of them equally if the dealers are all shrinking.”
Mark Porterfield, a Pimco spokesman, declined to comment, as did Ryan FitzGibbon, a spokeswoman for Bridgewater, and Ed Orlebar, a representative for BlueCrest.
Two Tiers
At the same time, regulators are examining the way larger firms benefit in markets where transactions are often executed the same way they were a decade ago -- through telephone conversations and e-mails.
In this two-tiered market, brokers choose which rivals and clients may see their bond prices on electronic trading systems by turning quotes on and off. Dealers often give bigger investors better prices in return for all of the business they do with Wall Street.
The SEC is examining to what extent smaller buyers are disadvantaged, and whether the behavior constitutes market manipulation, according to two people with direct knowledge of the matter who asked not to be identified because the probe hasn’t been made public.
“For the do-it-yourselfer, the disadvantages are growing by leaps and bounds,” said Marilyn Cohen, who manages $315 million of corporate and municipal bonds as founder of Envision Capital Management Inc. in El Segundo, California. “There’s a smaller and smaller market for money managers that aren’t the size of BlackRock and Pimco.”
Worse Prices
Investors typically get worse prices when they trade smaller blocks of bonds. One day last month, dealers sold $15,000 of steel company ArcelorMittal SA’s bonds maturing in 2041 for 3.5 cents on the dollar more than they paid to buy $25,000 of the same securities an hour later. By contrast, two exchanges of $100,000 or more of the debt that day were within 0.05 cent of one another, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.