Volume is down this year, but don’t tell that to the industry’s big block traders. For those guys trading billion-dollar blocks as part of overnight secondaries, business is booming.
According to data from Thomson Reuters, a clutch of the biggest banks handled $64 billion in “overnight” block trades for the 12 months that ended Oct. 31. That compares to about $40 billion in the prior 12-month period.
Behind the surge is the relative calm of the stock market as well as a dearth of liquidity. Both sellers and buyers are comfortable participating in these huge deals.
“The institutional buyside-the mutual funds and hedge funds-have become much more comfortable with doing bought transactions,” Scott Bacigalupo, Bank of America Merrill Lynch’s head of Americas cash sales and trading, told TradersMagazine earlier this year.
They’re called overnight block “trades,” but they’re really akin to secondaries that happen on a moment’s notice. Rather than spend two weeks on the road hawking their shares, owners-often private equity firms-dump them quickly at a discount.
Nearly one-third of all secondaries completed this year have been done as overnight block trades, according to Dealogic.
Owners contact a select group of broker-dealers shortly before the market closes and request a bid. The trades are typically valued at more than $1 billion and are priced off of the day’s last sale. The bidding ends at around 4:15 p.m. EST, and then the winning bank starts contacting its buyside customers looking for buyers.
The sale to the money managers is completed by the time the market opens the next day.
Most of the trades are done by a handful of firms that make their money from the spread between the price they pay for the block and the one they get for it from the money managers.
According to data from Dealogic, Citigroup, Barclays and Goldman Sachs have dominated the practice in 2013-controlling about 60 percent of the business.
Perhaps the most prominent block trade of the year was the $500 million sale of J.C. Penney shares by hedge fund manager Bill Ackman in August. The deal was handled by Citigroup. Ackman, who runs the Pershing Square fund, lost a reported $410.7 million, or half of his investment, on his original purchase of the J.C. Penney shares in 2010.
The business comes with its contradictions. While the overnight trade is a fairly routine transaction done by the same people over and over again, taking down a billion dollars worth of stock is not for the faint of heart.
“If it’s a private equity firm selling down another 15 percent of a stock that it has done on a regular schedule, then to Wall Street, it’s just a piece of meat to be priced,” said one big firm trader, who requested anonymity. “So, you basically have nine dogs fighting over this piece of meat, and the winner is sometimes not the winner.”
