Feb. 26, 2008 - Quadriserv Offers System for Short Sellers
to Compare Prices
Quadriserv Inc., the New York brokerage that specializes in lending to short sellers, will offer hedge funds and institutional investors a way to compare prices for stock loans used to bet on share-price declines.
Quadriserv’s Aquas system compiles current and historic rates for borrowing securities from as many as 13 different sources, co-founder Gregory DePetris said in an interview. Hedge funds typically arrange a loan through the two or three prime brokerages that handle their trades.
Short sellers try to profit from an expected drop in a stock’s value by selling borrowed shares and then buying them back at a lower price. Traders including Jamie Selway, managing director at New York-based White Cap Trading LLC, say the lack of a centralized market for such loans raises prices in the $10 billion market.
"People generally think securities lending prices are too high and that it’s not a very transparent market," Selway said."If Quadriserv creates an information product around it, that could be something people would tune in to."
Wall Street firms collect about $8 billion in annual fees from hedge funds for prime-brokerage services such as lending, clearing trades and record-keeping, according to Vodia Group LLC, a financial-services consultant based in Concord, Massachusetts. A record 23.7 billion shares were on loan in the U.S. as of Jan. 31, more than twice the level in 2001 after the Internet bubble burst, data from the three largest exchanges show.
"We’re giving people information that they mostly hadn’t seen before," Quadriserv’s DePetris said. "This should help organize the market more efficiently. It should make it more transparent."
Rival LendEx LLC, which has the backing of former Securities and Exchange Commission Chairman Harvey Pitt’s Kalorama Partners LLC, plans to create a system this year that pairs borrowers and lenders. BNY ConvergEx Group LLC, partly owned by Bank of New York Mellon Corp., has developed a program called "Hedgehunter" that makes it easier to locate loans.
Aquas displays current rates from six brokerages including Quadriserv, as well as three years of past transactions reported by 13 different sources. The system, which was introduced last August, and has been revamped with more data and historical prices, managing director Rick Geisman said. The firm declined to identify brokerages contributing prices.
The cost of an individual loan depends on the size and credit quality of the borrower, as well as the difficulty of locating investors willing to lend the shares. While that makes comparing transactions difficult, Aquas can give gauges for prevailing rates that can be used to negotiate better fees, DePetris said.
"We’ve got a very good picture of what is going on in the market, even with the pieces we’ve got," he said. "Clients are reacting to seeing new opportunities and realizing that the decentralized nature of the market isn’t helping them."
Demand from hedge funds will increase 56 percent over the next two years to $3.9 billion of loans, according to London-based Spitalfields Advisors Ltd. Demand will surge to $2 billion from $160 million last year from institutions adopting so-called 130/30 investment strategies, which involve making bets on falling prices with up to 30 percent of a portfolio’s value, according to Spitalfields.
Quadriserv received an investment last year for an undisclosed sum from Renaissance Technologies Corp., the East Setauket, New York-based hedge fund founded by James Simons. Bessemer Venture Partners, the 97- year-old venture capital firm that backed Staples Inc. and Skype Technologies SA, acquired a stake in Quadriserv in July 2005.
February 2008 - Boosting Securities Lending.
Former Nasdaq exec applies lessons from OTC years.
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
group of prime brokerage veterans. It offers
broker-neutral securities lending platform.
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.
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 Aquas, 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.
Aquas will help the client find the hardto-
borrow stock, increasing the number of
transactions and creating volumes of scale,
he predicts. Securities lending, Turner ultimately
hopes, will follow the same path as
Nasdaq trading.
Turner says the Nasdaq issues saw transaction
costs decline dramatically. "If more
people come into a market because they have
a better sense of execution capability and
insight into it, then the market will grow,"
Turner says. He hopes his extensive experience
in trading OTC issues will help.
Turner, 43, developed an expertise in market
structure during various stops in the trading
big leagues, including Salomon Brothers/
Citigroup, which went from a 25-person
trading desk to 125 as the firm evolved into a
unit of Citigroup.
By the time he left Citi, the desk was trading
about 1,000 Nasdaq stocks. Besides running
the desk, he was also responsible for the
development of new trading products. At
Salomon/Citigroup in the late 1990s, Turner
was also investigating market structure technology
issues in Nasdaq trading and looking
at execution issues in general.
The late 1990s was a time of dramatic regulatory
changes. It was the time of the order
handling rules. Trading executives had to cope
with massive technological change.
"I felt like I understood it and I had interesting
thoughts and theories about how it
should work," Turner says.
So Turner, during his Citi stint, developed
an expertise in how the OTC market
would become electronic. He was put on
Nasdaq’s Quality of Markets committee.
The committee developed Nasdaq’s trading
rules and technologies.
After that, he was recruited by the exchange
to take over a high-profile project. At Nasdaq
in 2001, Turner ran SuperMontage, which was
supposed to be a next-generation trading system.
It was designed to replace the Nasdaq
Workstation II, by attracting more liquidity to
the market. SuperMontage was an order display
and execution system that was going to
give traders the best, most up-to-date, information
from multiple parties, including market
makers and ECNs.
But Turner stepped into the middle of a
debate over whether Nasdaq, which was in the
process of separating from its regulator parent,
the NASD, was using the SuperMontage to
exert monopoly power. Nasdaq and its competitors
waged regulatory war.
Some arguments were over "arcane" issues
such as order delivery versus order execution
for ECNs, Turner says. The debate resulted in
an extensive amendment process at the Securities
and Exchange Commission.
The reality is some of those amendments
were probably filed to placate
people,” Turner says. In the end, Nasdaq
spent over $100 million to develop Super-
Montage. It then scrapped the system
when it got the Island ECN as part of its
acquisition of Instinet.
But in the spring of 2002, Turner was
recruited by CIBC to put his "thoughts and
theories" into action.
Here was the chance to take much of the
knowledge he had gained while working at Citi
and put them it practice. In the spring of 2002,
Turner began a four-year run with CIBC, running
its U.S. equity and sales trading. There he
supervised electronic trading, including program
and direct- access trading. Yet after four
years, Turner suddenly decided he needed to go
back to school for an MBA "I wanted to
expand my opportunities, and one of the ways
was to further my education," he says. He
insists that he didn’t pursue his MBA because
he believed his career path was blocked.
"I just wanted to round out my skills sets
and get some other experience. This was a
way of doing that," he says. Now he hopes
to combine his knowledge and education in
an effort to help another underdog do what
his beloved Red Sox have done over the past
few years. And woe to those who walk away
from his underdog.
Turner now uses his autographed jersey of
Johnny Damon, who left the Sox to sign with
the Yankees for big bucks, as a rag to wash
his car.
April 2007 - New Kid on the Block.
Upstart doesn't expect all the stock lending business. It just wants to wet its beak.
There’s a lot of fat in the securities lending services sold to
hedge funds by the biggest prime brokers. At least that’s
what the leaders of upstart securities lender Quadriserv contend,
as they target the sweet spot in the industry: hedge
funds. These funds’ voracious appetite for borrowing stock for
short-selling strategies is well known—and a key component
to prime brokerage profitability
But Quadriserv execs say they have a broker-neutral securities
lending platform that won’t tie funds to prime brokerages.
“Now when [hedge funds] need to borrow a security and
get a locate on it, they need to execute with that same prime
broker,” says Gregory DePetris, one of Quadriserv’s founders.
And that often means higher costs, he says.
The firm’s new automated agency model is a kind of cooperative
securities lending service designed to take advantage of
unbundling. By decoupling a piece of the prime brokerage
service, Quadriserv hopes to convince hedge funds that they
can lower funds’ borrowing costs.
If a guy is long margin stock, he may be borrowing at Fed
Funds plus 30 [basis points]. We’ll show him how he can do
it at a Fed-plus-15 rate,” says Joseph Weinhoffer, founder and
CEO of Quadriserv. “And now he knows he can borrow
money from us cheaper than he can from his prime broker.”
Quadriserv’s supporters say the securities lending market
today is opaque, reminiscent of Nasdaq in the early 1990s.
Josh Galper, managing principal
Group, sometimes advises clients
Quadriserv is an unbundling play.
So maybe this upstart can lend cheaper and shine light on the
market. But does it have the flow? To do battle with the primes,
Quadriserv must convince prospective clients that it does.
“When you’re dealing with an illiquid over-the-counter
marketplace, you don’t inherently know that there’s enough
internal liquidity there, as you would with Goldman [Sachs] or
Bear [Stearns],” says one trading industry player who knows
Quadriserv, but asked not to be named.
According to Quadriserv, the firm has
commitments from custodians for $2
billion in exclusive assets. Quadriserv also
has a $50 million letter of credit with the
Bank of New York. The firm isn’t profitable
yet, since the brokerage arm only
launched a year ago. But Weinhoffer
expects profitability in the next 12 to 18
months.
Brad Hintze, an industry analyst with
Bernstein Research, believes prime brokerages
are ripe for competition. For example,
say a fund is paying a legitimate high price
covering a hard-to-find stock as a short,
Hintze says. But the market shifts. Now
the security is no longer expensive.
“Nevertheless, you’re not going to get
cut. They [the prime brokers] are going to
leave it at its original price,” Hintze says.
DePetris believes Quadriserv’s agency model will appeal to
hedge funds that have the ability to borrow stock away from
their primes, enabling them to save money. He hopes many
will believe it isn’t necessary to give all their business to the
major prime shops like Goldman Sachs, Morgan Stanley and
Bear Stearns, all of which declined to comment for this story.
“There’s room enough in the world for both of us. We provide
a pretty targeted service to a pretty targeted constituency,”
DePetris adds.
“Theoretically, the Quadriserv model should be attractive
to hedge funds,” says Vodia’s Galper. “But what Quadriserv
and others are really up against are cultural and businesspractice
change.”
And there’s another hurdle that keeps hedge funds from
bringing in a new lender, Galper says. Switching any or all
securities lending from a prime brokerage to a Quadriserv
would mean higher technology costs.
But others are also getting into the act. Quadriserv’s
Weinhoffer says European banks are moving into the securities
lending business and aim to provide cheaper financing to
hedge funds. Weinhoffer says these businesses want to use
securities lending to establish relationships with hedge funds.
Still, many hedge fund officials are hesitant to change their
relationships with a single prime broker. They depend on
the broker for research, using its name to obtain meetings with
company management. So hedge funds
become dependent on the brokerage
leviathans, which provide valuable soup-tonuts
services.
From the perspective of the big prime
brokers, these services generate a lot of
income through margin loans, clearing and
securities lending.
Industry players tell Traders Magazine
that securities lending, as part of a package
of prime brokerage services, is generally a
good business, one in which hedge funds
will often overpay. However, competition
has generally stayed among the top prime
brokerages. Now, the entrance of new players
is changing the securities lending, just as
electronic communications networks and
alternative trading systems changed stock
trading in the late 1990s.
More entrants mean some aspects of securities lending—
like margin lending—can be less profitable or even loss leaders.
The squeeze in this area has resulted in tighter margin
spreads and what Bernstein Research calls “a technology
arms race” in the securities lending business. Worse than that
for those who want to be a part of this business, hedge funds
are now demanding dirt-cheap rates.
“In margin lending,” Bernstein Research writes, “the largest
hedge funds have been able to negotiate their loans as low as
Federal Funds plus 30 basis points, which means that the margin
loans are generating returns well below the costs of capital
for the lender.”
Quadriserv
began as a data
business in the fall
of 2001, providing
stock loan transaction
information to
hedge funds, and
growing by referral.
By 2004, Quadriserv
Securities, a brokerdealer,
was launched.
Quadriserv has been
trying to undercut
the prime brokerages
by disclosing
its pricing to both
sides of a trade.
But it does not
reveal where the
stock came from,
according to Weinhoffer.
How? The firm is betting on the continued boom in hedge
fund business and the acceptance of unbundling. That’s something
one Quadriserv official calls “an inevitability.” It is also
betting that the big prime brokers won’t turn and swat down
the new kid on the block. Maybe one of them might buy
Quadriserv and “move on,” one trading executive suggested.
So who is the target client most likely today to benefit from
Quadriserv’s model?
Hedge funds that are not raising money, don’t need research
or capital introduction, and have dozens of executing brokers,
Weinhoffer says. In his view, these funds are probably overpaying
for securities lending.
Quadriserv’s preference is for clients that give it about 20
percent of their securities lending business. The firm
doesn’t expect these clients to walk away from their prime
brokerage relationships.
“There are valuable services that a prime brokerage
performs,” DePetris says.
He stresses that Quadriserv has a limited menu and that the
best prime brokers can deliver vital services
to hedge funds, including accounting,
research, clearing and execution, and a
deeper inventory of hard-to-get stocks than
a Quadriserv could muster.
Bernstein’s Hintz adds that hedge funds’
dependence on prime brokers may hinge
on other factors as well. Many funds with
limited infrastructure rely on their primes for services they’d
rather not build themselves. In trading, as in life, some fat may
be inevitable—and even necessary.
“These hedge funds are run by the best traders in the
world,” Hintz says, “but they don’t have the scale to make
sure that they’re not being nickled-and-dimed by prime
brokers.”
Posted with permission from the April 2007 issue of Traders Magazine. Copyright SourceMedia Inc. and Traders Magainze 2007. All rights reserved.
January 2007 - AlphaBytes / Short-Selling
Gregory DePetris failed fifth-grade math and dropped out of college. Nevertheless, at 32 he has two thriving start-ups behind him and is knee-deep in a third. As a co-founder of New YorkÐbased Quadriserv, a broker-dealer specializing in securities lending, he is helping to create a technology platform to automate the lending process hedge funds rely on for short-selling. The launch is targeted for early this year. If things go as he plans, Quadriserv's platform, which will also introduce price transparency between lenders, could revolutionize stock lending.
DePetris worked part-time on the floor of the New York Mercantile Exchange when he was a 17-year-old freshman at Fordham University. He dropped out of college to become a full-time trader, coheading a foreign exchange arbitrage operation before deciding to apply his market knowledge independently. Hedge funds rely on shorting - selling borrowed securities in hopes of buying them back later at a lower price to return to the lender - as a cornerstone of their investment strategy. Prime brokers have acted as intermediaries, aggregating securities from mutual fund firms and other big owners looking to lend them for a fee.
During the past five years, technology advancements have allowed prime brokers to furnish their clients with more-sophisticated services. They now use real-time information on supply and demand for lendable securities to automate the matching of borrowers with lenders, and detailed market data to provide pretrade and posttrade analysis. But although some of the benefits of these technologies have been passed on to hedge funds, prime brokers have been the main beneficiaries.
"Hedge funds have no idea where the marketplace is for borrowing securities," says Joseph Weinhoffer, Quadriserv's co-founder and CEO. "They borrow only from their prime brokers, and they pay what ever their prime brokers charge." But as such service providers as Quadriserv look to bring automated matching technologies for lending to borrowers and lenders directly, hedge funds will no longer rely solely on prime brokers for their shorting strategies. Although Quadriserv already offers real-time information about lending supply and demand online, trade orders are still placed entirely by phone. Securities lending can be extremely complicated. When a hedge fund borrows shares for shorting, it must post collateral - usually cash, which is put into a short-term, interest-generating account based on the intended federal funds rate - currently 5.25 percent. If a fund doesn't have the necessary cash for collateral, it can borrow the money - a practice known as buying on margin. When a short position is closed, a portion of that interest is paid to the lender, part is returned to the borrower, and the rest - the spread - goes to compensate the prime broker. The cost of borrowing is affected by the difficulty of finding available shares. Add to that the exclusive agreements prime-brokers have with lenders and the brokers have all-but-free reign over the spreads they get as middlemen.
Charles (Brad) Hintz, an analyst with Sanford C. Bernstein in New York, estimates that the average spread prime brokers make off U.S. securities is anywhere from 25 to 50 basis points, and about 100 basis points for non-U.S. stocks. More-accessible stocks can be borrowed for as little as the fed funds rate plus 10 basis points. Spreads on hard-to-borrow securities can exceed 250 basis points - fees that are partially offset by the rebates borrowers receive on the cash collateral they post. Margin finance and securities lending is estimated to generate roughly 60 percent of the $8 billion to $10 billion consultants predict the prime brokerage industry will reap this year.
Hedge fund managers have noticed, and begun questioning, these lofty fees. "There is no one central marketplace in securities lending, so the rate you get isn't the rate your neighbor is going to get," says Joshua Galper, managing principal with Vodia Group, a consulting firm based in Concord, Massachusetts. He estimates that funds borrowing from prime brokers typically overpay them by 75 basis points, on average. For a $500 million short portfolio, that translates into $3.75 million annually in lost profits. Galper believes that as products such as Quadriserv's new platform make their way to hedge funds, the lending process will change dramatically. Within five years he expects to see a transparent, centralized electronic communications network for securities lending where hedge funds can access fast, accurate, transparent rates for any security, with pricing based on their individual credit profiles.
In the past, information about whether a particular security was available for borrowing - known in the industry as a "locate" - was gleaned through calls between a buyside trader and a broker-dealer. Since automated systems were introduced five years ago, prime brokers have been electronically providing hedge funds and other borrowers with real-time inventories of available securities, what the securities trade for and whether the trade can be completed with a single keyboard stroke.
Real-time information has allowed hedge funds to make more-efficient decisions, translating to more- frequent shorting. Paul Busby, the New York-based head of North American securities lending for Deutsche Bank, says his group processes roughly 185,000 to 200,000 equity locates a day. Technology has also improved prime brokers' ability to manage their inventories of lendable securities and to obtain new supplies, helping them guarantee that their hedge fund clients have access to shortable securities. Electronic lending platforms like BostonÐbased ESecLending and New YorkÐbased EquiLend expand availability and transparency, providing prime brokers with screen-based auctions of lendable securities portfolios directly from the mutual funds and pension funds that own them.
In May 2006, ESecLending held an online auction of exclusive borrowing rights to about $76 billion of the California Public Employees Retirement System's U.S. equities. Citigroup had the winning bid for $58 billion worth of Dow Jones Wilshire 2500 index and Dow Jones Wilshire U.S. micro -cap index assets; Goldman, Sachs & Co., JPMorgan Chase & Co. and Lehman Brothers won access to other portions of the funds.
EquiLend, an automated borrowing platform for financial institutions that is co-owned by 11 banks and broker-dealers, executes trades based on the defined set of rules and instructions users enter into the system for their searches. For example, a trader could ask the system to search every fourth day for stocks with less than $50 million in capitalization.
"A lot of the large hedge funds still don't have their arms around the concept of portfolio finance," says Jon Ottomanelli, the New YorkÐbased managing director and global head of securities lending for Citigroup, which has aggressively ramped up its technology efforts. New systems, such as Citibank's Web-based PrimeLocate, allow hedge funds to tap the firm's $1 trillion global inventory of stocks. Merrill Lynch has also aggressively responded to hedge fund managers' desires to incorporate prime brokers' services into their technology platforms - such as their trade order management systems. Robert Bowers, a director of sales and trading for global markets financing and services in Merrill's London office, says the ability to link systems together has benefited the firm as well as its clients, allowing each to reduce the hours spent on simple transactions and concentrate instead on more- difficult ones.
"Clients can take digital information, incorporate it into their systems, hit a button, and the transaction is almost executed," says Bowers, explaining that, although a trader still needs to complete the transaction, the prime broker's system is just a step from full automation. Merrill, he adds, has begun providing hedge funds with market analysis - enabling sales traders to electronically ßag the direction in which they predict a stock will move. "Our desk wants to be alpha-generating, via value-added sales trading," he says. Pretrade analytics allow a hedge fund that is considering shorting a stock to use the availability and cost of borrowing that security, along with its current trading price, to model the likely outcome of shorting it. Conversely, a quant firm could use the same information to determine whether additional shorting activity might put downward pressure on a stock's price. As hedge funds have embraced such services, prime brokers and technology vendors have responded by developing others, such as posttrade analytics.
Deutsche Bank is doing just that. Anthony Byrne, the London-based global head of its securities lending operations, says the firm measures historical trend analysis against inventory to create demand, supply and fee profiles for clients. It can thereby forecast their future shorting activities within particular sectors and monitor for potential reratings by analysts or ratings agencies that could affect a security's trading price and a hedge fund's strategy. Deutsche feeds this data through its equity derivatives strategy research group, which looks at convertible bonds, special situations and equity derivatives. So far, the firm is the first to create a dedicated research arm within its securities lending group. Prime brokers are also using technology to help hedge funds enhance their returns through synthetic lending. Managers can replace long positions, particularly in hard-to-borrow securities, with derivatives. Byrne says Deutsche Bank is using derivatives to create inventory, by buying shares for lending and hedging price moves by selling correspond ing futures or options contracts. Prime brokers' efforts to add new services are also being driven by the awareness that as price transparency and automation reshape the hedge fund industry, the shift could cost them business and force them to lower their pricing.
"Prime brokers can borrow much more cheaply than they are willing to lend, and their clients are thinking, ÔIs this right?'" says Timothy Smith, president of Boston-based Data Explorers, a firm with five Web-based products that generate data on the performance and profitability of securities lending. The products provide mutual funds and pension plans with information on the volume of securities being lent and the borrowing rates prime brokers pay - a bellwether for institutions to determine price points for their own lending. Data Explorers is also developing products that will feed similar rate information to hedge funds. To help hedge funds negotiate better rates with their prime brokers, Quadriserv's service generates data on the amount of stock institutions are willing to lend and the going rate for borrowing. In 2004 the company established a broker-dealer as the intermediary in a system designed to act as a netting facility for hedge fund financing - a kind of Liquidnet for securities. Just as Liquidnet's automated system lets buyers and sellers bypass brokers by anonymously executing block trades against one another, Quadriserv's service allows hedge funds to lend and borrow shares directly, cutting out prime brokers. Quadriserv began executing lending trades in December 2005 and now has 16 counterparties, including hedge funds, whose assets under management range in size from $400 million to $10 billion. The firm expects the number of counterparties to reach 50 within the year.
By directly matching borrowers and lenders, Quadriserv plans to undercut the spreads prime brokers charge. Its platform will also let hedge funds simultaneously lend shares they own long and borrow those they want to short. As hedge funds provide Quadriserv's system with indications of the shares they are willing to lend and those they want to borrow, the system identifies matches and executes the trades. "We're moving pretty quickly from the Stone Age into modern technology," says Quadriserv's DePetris.
Posted with permission from the January 2007 issue of Alpha. Copyright Institutional Investor 2007. All rights reserved.
Download PDF