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July 5, 2006

Super Blocks Through Reverse Inquiry

By Editorial Staff

They're called "reverse inquiries" and in last year's fourth quarter these mega-block trades were all the rage. Fidelity Investments reportedly got the ball rolling with these types of trades after it courted bids from the Street as it restructured key holdings. Some say Fido was restructuring its Magellan Fund. Others say it was the Growth and Income Fund. Either way, a slew of monster-sized blocks hit the Street.

A reverse inquiry, more common in fixed income markets, occurs when a money manager calls up the syndicate desk at a broker's capital markets group and asks if the firm would be interested in purchasing millions of shares of a particular stock. It's a single trade, using the broker's capital.

It is considered a "reverse" of the traditional underwriting scenario where an issuer calls up the investment bank and asks it to move an offering out to institutional investors. This, along with the continuous and growing number of corporate spot secondaries, is what got the buyside's juices flowing again to trade in block size at the end of last year, sources say.

"It's new, but it hasn't gotten a lot of traction," commented one source familiar with large money managers. The fear is still leakage, he said, which is why the buyside desk has no idea about the inquiry, nor does the broker's traditional trading desk. The syndicate desk also has a better handle on risk and pricing a block that is the equivalent in size of a spot secondary offering, he added.

Guess what? It was effective. "People were saying, hey, this really works,' " a source said. Consequently, a few other large money management firms jumped into the game, under the umbrella-or beard-that it was a Fidelity restructuring.

Reverse inquiries then died down this year. One source said the success rate is still fairly low: "It's about one out of twenty," he said. One buyside trader also noted that this strategy might work in the large caps, but brokers have no interest in providing outsized liquidity for the slow traders in the mid- and small-cap names.