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September 2, 2013

Buybacks on the Rise

Liquidity hungry buyside traders are finding new sources of liquidity amid increase in corporate America activity

By James Armstrong

Corporate buybacks are on the rise, and that's good news for liquidity-hungry buyside traders.

During the first six months of the year, more buybacks were authorized than during the first half of any year since the 2008 financial crisis, according to data from research firm Birinyi Associates.

Through the end of June, corporations authorized more than $411 billion in share buybacks, according to Birinyi. That compares with less than $256 billion authorized at the same point last year. To find anything close to this year's numbers, you have to go back to 2007, when companies authorized about $417 billion in buybacks through the end of June.

Bill Bell, Barclays

Robert Leiphart, an analyst at Birinyi, said that after seeing stocks trend upward since the lows of 2009, corporate management is frequently looking for ways to return money to shareholders.

"Companies feel better about the financial picture, so they're a little bit looser with their purse strings," Leiphart said. "These companies need something to do with the money, and a buyback program offers the most flexibility."

There are some alternate uses for that excess cash. Companies could issue larger dividends, for instance, or they could invest in their businesses, hiring new workers and expanding operations. In a still-uncertain economy, however, buybacks seem to offer the least possibility of a downside in the future.

Leiphart points out that if a company later has to reverse course, reducing a dividend or cutting back its workforce, there is typically a negative consequence for the stock price. On the other hand, if a company does not complete an authorized buyback, it rarely if ever has a negative impact on the stock. In fact, many authorized buybacks are never fully completed.



So far this year, corporations have actually executed a little more than $118 billion in buybacks, but Leiphart said he has seen an increase in the number of accelerated buyback programs, so the second half of 2013 could see a lot more repurchasing of shares.

The trend is providing opportunities for the buyside to interact with safe, quality liquidity that won't lead to information leakage. This surge in buybacks could help institutional traders looking to move large numbers of shares without also moving prices.

Ryan Larson, head of U.S. equity trading at RBC Global Asset Management U.S., summed it up for the buyside. He said he is interested in accessing liquidity, from buybacks or elsewhere, in a dark pool or on a public exchange, so long as he can avoid getting gamed.

See Chart: Buyback History

"Right now, real liquidity is hard to find," Larson said. "Whether it's in a dark pool or a lit venue, we're looking to avoid information leakage, prevent moving the market and protect our clients against the adverse effects of high-frequency trading."