AX Trading Network announced the launch of “DirectAX,” an offering that allows investment banks working on behalf of issuing companies and private equity/venture capital firms to use the alternative trading system’s call auction system to directly sell institutional investors blocks of stock.
The ATS also intends to add the ability to conduct corporate buybacks via the AX auction as well.
Under the DirectAX approach, the selling shareholder can sell shares directly to institutional buyers via an investment banking sponsor. The AX auction process fosters competition among buyers and could help the issuing company or PE/VC firm to receive the best price for their shares. In this case, the sponsor is Merriman Capital, a San Francisco-based boutique investment bank and brokerage firm. Merriman will offer DiectAx to its clients.
The upside? This would aid the buyside in sourcing block liquidity in small-cap stocks. And small-cap stocks are AX’s sweet spot as the ATS is geared toward trades of small capitalization stocks that may be difficult to get done in the public markets.
Here’s how it works. Under DirectAX, shares are sold directly to institutional investors via a block trade. The selling entity can set the minimum size of the block trade and also the lowest possible price they would accept for their sale. By transferring shares directly from the selling entity to long-term holders, the DirectAX approach can help lead to lower market impact and improved execution for corporate clients.
“The AX Trading Network is all about connecting equity market participants in a secure environment,” said AX Trading chief executive Kevin Callahan. “DirectAX extends our network to the corporate community, allowing companies to efficiently raise capital from leading institutional investors and allowing private equity and venture capital firms to monetize their public holdings.”
AX’s call auction process began in 2011. The auction process works this way. To initiate an auction, a trader transmits a firm-and priced-order of at least 25,000 shares. Most orders to date have been “blind” where the initiator only discloses symbol and size. He does not reveal whether he is a buyer or seller. Nor does he reveal his price.
The order triggers a series of email blasts to traders who have previously expressed interest in participating in auctions. Those traders then transmit their own orders. The entire process takes five minutes. Trades that get done occur at a price that clears the market.
The process effectively automates the telephoning work of an upstairs trader.
AX Trading Network also offers its users the ability to schedule an auction in advance, giving more parties a chance to participate, and hopefully to provide more liquidity. Traders invited by the auction’s initiator can then take part in the auction at a specific time, either during market hours or during pre- or post-market trading.
As with on-demand auctions, the initiator of a scheduled auction can determine whether to make the auction blind or to disclose if the host is a buyer or seller. So far, most auctions on AX are blind, but Callahan said as traders become more familiar with the system, they tend to get more comfortable with sharing information.
Auctions on AX run for five minutes, which is generally not enough time to get portfolio managers and analysts involved-unless there is advanced notice. A scheduled auction promises to bring in more participants and to allow those participants to be more fully informed.
