Boosting Securities Lending at Quadriserv
Former Nasdaq exec applies lessons from OTC years
January 2008
Former Nasdaq and CIBC World Markets trading executive Bruce Turner was once part of the solution that helped over-the-counter equities become more efficient. Now he hopes to do the same for securities lending. Turner, a rabid Boston Red Sox rooter, likes underdogs who overachieve. His journey has taken him from one of the biggest trading houses, CIBC, to a relatively small securities lender, Quadriserv. He says he likes the challenge of serving a niche business at a small firm.
In an interview with Traders Magazine, Turner says he now has a chance "to remake a business." Turner, who serves as managing director and chief operating officer at Quadriserv, thinks he will once again have a chance to make as dramatic a difference as he did with OTC.
Quadriserv was founded in 2001 by a group of prime brokerage veterans. It offers a broker-neutral securities lending platform.
Overpaying
So at a time when many securities lenders' clients are calling for an electronic market place that will save them from paying dearly whenever they need an illiquid stock, Turner is attracted to securities lending because he thinks his firm will move the market toward more efficient electronic standards, he says. "Securities lending is exciting because it's the convergence of a few different opportunities. These include improved technology, the creation of a tradable asset class and a general chance to improve the quality of markets for public investors."
He says Quadriserv is offering services that will persuade hedge fund managers that securities lending isn't a rigged game. Turner has a daunting task ahead of him. According to a recent report by the consulting Vodia Group, 27 percent of hedge fund managers believe they "are overcharged on securities lending rates by their prime brokers." And 77 percent of poll participants say they want securities lending to become electronic at a time when much of the business is done by phone.
Some may be reminded of Nasdaq in the 1980s. That's when Turner began his career with stints at Oppenheimer & Co. and Salomon Brothers. This is where Turner hopes his expertise, running trading desks and spending a year at Nasdaq overseeing SuperMontage, will be useful.
Turner says Quadriserv is seeking to connect lenders and borrowers "in more innovative ways." Transparency, in and of itself, will not improve the securities lending business, he says. "Borrowers need a way to find the intrinsic value of a daily stock-lending rate and borrowers need to find the true cost of their shorts," he says.
It's Coming
Turner also acknowledges that many securities lenders expect that some form of electronic-screen-based trading is inevitable, a sentiment supported by the Vodia Group report.
"Most participants ultimately accept the ascendancy of electronic bid-ask markets but few custodians or brokers want to be the first to embrace them," the report says. The report predicts that brokers will open up electronic markets to a range of hedge funds "very shortly."
Quadriserv hopes to solve many of these problems with ProQure, its Web-based application service designed for both lenders and borrowers of securities. Those include hedge funds, long-only funds, 130/30 funds and custodians. The service also has historical data so that managers can see what has been happening in the stock loan rebate market.
Lenders pay an agreed-upon rebate rate on the cash collateral received in stock lending. An agreed upon rebate rate for transactions is based on the Federal Funds rate and is adjusted daily as the rate changes. This is important, Turner adds, in convincing hedge fund managers that they can receive fair value in securities lending.
"We want people to see what is happening in the loan rebate market for a security. You can see that the rate changes based on corporate action or the fundamentals of the stock, etc.," Turner says.
This is not a complete screen-based-electronic lending service but it is a step in that direction, Turner points out.
Still, Turner says the industry shouldn't make a fetish of screen-based, electronic lending. Instead, he says it should focus on ensuring that hedge fund managers and others using securities lending can understand how rates frequently move.
For more information on related topics, visit the following:
