Direct Edge Targets Stock Lending In Quadriserv Partnership
July 15 2009 - 2:59PM
Dow Jones News
Direct Edge, which runs one of the largest U.S. equity trading
platforms, announced plans to move into stock lending through a new
agreement with stock loan platform operator Quadriserv Inc.
The partnership, which looks to more efficiently link cash
equities trading to stock loans, marks the first step of Direct
Edge's move into other asset classes as it progresses toward
becoming an exchange in early 2010.
"A lot of our common customers are doing stock loans and cash
market transactions simultaneously, and in relation to one another
- you're borrowing to sell short, buying and then lending
inventory," said William O'Brien, chief executive of Direct
Edge.
The memorandum of understanding between the companies, announced
Wednesday, aims to "affect transactions more seamlessly through
tighter integration of these two markets," O'Brien said in an
interview.
For Quadriserv, a company dedicated to centralizing the stock
lending process, it marks another exchange alliance after the
options-focused International Securities Exchange invested $15
million in the company in March.
The ISE, a unit of Deutsche Boerse AG (DB1.XE) also holds a
31.5% stake in Direct Edge.
Quadriserv's AQS platform is designed to connect lenders and
borrowers of stock, improving price transparency in a market
estimated at $1.6 trillion.
Stock lending is key to short selling stocks, which has come
under scrutiny following the financial crisis. Regulators are
weighing a new version of the uptick rule, a repealed regulation
that limited short sales, with a decision expected near the
summer's end.
Quadriserv's AQS platform became operational in January and has
since added more participants ahead of a broader launch, targeting
broker-dealers and hedge funds that borrow securities, along with
custodial banks that are lenders.
Over that time, Direct Edge has become the biggest U.S. equities
market operator behind NYSE Euronext (NYX) and Nasdaq OMX Group
Inc. (NDAQ), though rival electronic market BATS Exchange has
narrowed the market share gap this month.
On the heels of BATS' announcement last week that it would
launch an options exchange, O'Brien detailed Direct Edge's own plan
to diversify into other asset classes through execution services
and clearinghouse link-ups.
In the short term, Direct Edge's partnership with Quadriserv
will mean savings for investors looking to integrate securities
lending with their stock trading activity, according to
O'Brien.
Further out, O'Brien sees potential for new, tradable products
structured around stock loan agreements, which he likened to
forward contracts.
Besides the ISE, Direct Edge's backers include Knight Capital
Group (NITE), Goldman Sachs & Co. (GS), Citadel Group, JP
Morgan Chase & Co. (JPM), Bank of America Corp. (BAC), Nomura
Securities (NMR) and Sun Trading.
Investors in Quadriserv include Interactive Brokers Group Inc.
(IBKR), SunGard, Bessemer Venture Partners, Renaissance
Technologies and Round Table Investment Management.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com