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February 16, 2007

Buyside Looks to the After-Hours

By Nina Mehta

The number of large blocks trading after the markets close is on the rise. Frustrated by the inability to execute large trades intraday, some institutions are turning to brokers to help them exit positions after the close.

Jim Malles, head of U.S. equity trading at UBS Global Asset Management in Chicago, says he hears about one or two large trades every day. After-hours block trading has increased about 50 percent over the last year, he estimates.

Other buysiders are also taking notice. "If millions of shares are being pulled to the after-hours time frame, you need to think about that," says Mark Kuzminskas, director of equity trading at Robeco Investment Management. "That's a significant chunk of liquidity."

Robeco doesn't currently trade after the markets close, but is considering doing so. The firm, which has $17 billion in U.S. equities, may reassess its brokers to determine if it should seek out relationships that would open those doors. "It's a fair amount of risk that a broker-dealer would be putting up. If you don't have that clout [with your brokers], you won't have that risk offered to you," Kuzminskas says.

Bulge-bracket firms are reputed to be doing these after-hours block trades. According to buysiders, the pricing is aggressive and more competitive than it would be intraday.

After-hours trading benefits brokers in several ways, Kuzminskas says. There's less information leakage than there is during the day and it's a "more stable price environment." Large transactions also force asset managers and others to take notice, he adds.

Malles, whose firm manages more than $75 billion in U.S. equities, says his most recent after-hours trade was for roughly three days' worth of volume. During market hours, UBS Global Asset Management told the syndicate desk of a broker it had a large block of a stock to sell. They discussed pricing and agreed on a particular discount off the closing price that day.

Malles says the general rule of thumb appears to be a 1.5 to 2 percent discount for one day's volume of a stock, though there can be variations on that discount pricing model. The broker who takes on that risk then tries to find demand-contras-for the other side after the market closes.

Malles says he was pleased with how the trade turned out. "I didn't feel there was any information leakage," he says. "Between the time we called the syndicate desk and when the market closed, the stock actually outperformed the overall market by almost 50 basis points." Sellside syndicate desks rather than sales traders often execute these after-hours transactions.

UBS Global Asset Management will be doing more block trades after-hours in the future. "If you have a large order to move in a short amount of time, this could be a good alternative," Malles says.