Bank of America Corp. (BAC:US) is seeking to trade bigger blocks of shares for mutual funds and institutional investors by finding new ways to connect orders across the company’s equities-trading desks.
The bank will pursue larger transactions through a system of messages indicating buy or sell interest that can be sent among the different groups within the firm and executed instantly, according to Jason Crosby, New York-based managing director and global head of portfolio distribution. The tool enables matches for institutions with private clients, the firm’s cash and portfolio trading units, and derivatives desks handling customer orders, he said in an interview.
Bank of America is focusing on long-term investors as clients expand investments in individual companies relative to exchange-traded funds and index products amid growing confidence in the economic recovery, Crosby said. The Dow Jones Industrial Average closed above 14,000 Feb. 1 for the first time since 2007. Fidelity Investments, the second-biggest U.S. mutual-fund company, last year also introduced a product geared toward institutions seeking to buy or sell blocks of shares.
“The macro events we’ve been living through globally have started to subside,” Crosby said. Clients are “looking to single stocks for growth but can’t aggressively go into the market” without driving prices higher or lower by their actions, he said.
The second-biggest U.S. bank by assets is counting on more stock picking to boost interest in trading blocks on its platform. Equities are responding more to company-specific developments such as earnings and merger speculation after being pushed up or down by events from the credit freeze to Europe’s debt crisis to the stalemate in U.S. budget negotiations.
A gauge of how much the 2,073 companies in the FTSE All- World Developed Index (FTAD01) swing in unison dropped 31 percent since June, the biggest retreat since at least 1993, according to data compiled by Societe Generale SA and Bloomberg last month. The reading measures how much returns in individual stocks are attributable to swings in the broader market.
Equity mutual funds also attracted $29.9 billion in January’s first three weeks, more than for any full month since 2006, according to data compiled by the Investment Company Institute.
Fidelity, which started a dark pool called CrossStream in 2006, added a feature last year that allows institutions making decisions based on a company’s fundamentals to trade with other institutions and retail clients. Investors using BLOX can avoid brokers, quantitative traders and high-frequency firms, Brian Conroy, president of the Boston-based company’s Fidelity Capital Markets division, said in December.
“Within the last six months, block trading has increased, Thomas Garcia, head of equity trading at Santa Fe, New Mexico- based Thornburg Investment Management Inc., said in a phone interview. ‘‘One of the reasons for more interest is high- frequency guys trying to get in front of your order and profit from price moves.’’
Bank of America’s introduction of the messaging product is part of a rebranding of its global equities division under the banner Trader Instinct. Its MLXN dark pool, or private venue for U.S. shares, is now called Instinct X. An upgrade to its suite of algorithms, or automated strategies that allow clients to break bigger orders into smaller bits funneled to exchanges or other venues, will be introduced later this year, according to Oliver Sung, a director in global execution services.
Institutions currently trade blocks by calling sales traders who make phone calls or send messages to other clients that might be interested in the same stock. They may also route to dark pools, which don’t display orders, or use algorithms to buy or sell over a specified period of time.
Traders balance the need to accumulate or pare a large position with the desire to avoid detection by certain types of high-frequency firms in the public market. Automated trading firms conducting data analysis that spot a buyer may drive prices higher to profit from the move, or push prices down when they identify a seller.
”It’s a safer, less-toxic venue for our highest-level institutional and private clients,’’ Crosby said about the new block product. “There’s a fundamental shift in clients’ appetite for showing a little more information to get a block done.”
The product, called Instinct Natural, will initially be available to the firm’s 75 largest institutional clients, Crosby said. It will be introduced later this quarter, with transactions occurring through Instinct X. The company began working on the project five months ago with the support of senior management including Soofian Zuberi, global head of equity distribution, Crosby said.
Bloomberg LP, the parent of Bloomberg News, offers an indications-of-interest service to customers seeking block trades.
The bank’s focus on trading large holdings of shares for institutions comes as it stresses customer relationships as a way to expand its equities market share and spur revenue against the backdrop of an improving economy.
Bank of America salespeople assigned to the biggest mutual fund accounts were told in September to attend at least 30 meetings a month with clients, a move that riled staff, according to two people with direct knowledge of the matter in November. The memo from Zuberi told more than 500 workers to see clients in person more often, rather than relying on e-mail and phones, the people said.
The instruction showed the pressure Wall Street firms are under to capture a bigger slice of institutions’ trading fees. It also emphasized the importance of personal relationships to generating revenue, Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, said in November.
The U.S. securities industry split $10.9 billion in equity commissions from asset managers in 2011, the lowest fee level since 2006 as average daily volume declined, according to the most recent data compiled by Greenwich Associates. Declining fees puts pressure on asset managers to consolidate trading among their most important brokers to pay for stock research and other services, Jay Bennett, managing director at the Stamford, Connecticut-based research firm, said last May.
Crosby, who reports to Zuberi and Ashok Krishnan, the London-based global head of execution services, said clients often use what are called schedule-based algorithms to execute blocks. These are automated strategies that buy or sell a certain number of shares or percentage of a stock’s volume over a period of time, often randomly changing characteristics of the smaller orders to evade detection by computer systems looking for signs of institutional activity.
Bank of America aims to convince clients to let it seek out blocks instead of using these strategies, or to employ both to complete an order, Crosby said. The firm is talking to institutions about whether they’d be willing to allow a period of time prior to accessing liquidity venues outside of Bank of America when the bank can seek block trades, he said.
Customers will be able to access Instinct Natural through their equity sales trader or electronic methods. The bank will track data from Instinct Natural shared across its desks, how often people respond to messages indicating trading interest and how stock prices move to ensure that information isn’t leaked into the market, Crosby said.
“If someone receives an invite that there’s a counterparty and there’s interest, we have to make sure they engage and don’t misuse the information,” Adam Inzirillo, a director in global execution services at Bank of America, said by phone. “Even though it’s institution-derived, we have to ensure all counterparties are acting appropriately.”
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