Securities-Lending Exchange Woos Managers

The operator of the only U.S. securities-lending exchange is pushing to expand the marketplace, in part, by making it more accessible to hedge fund managers.

Quadriserv's AQS exchange currently serves some 60 prime brokers, hedge fund operators and institutions that borrow and lend stocks. Until now, however, only self-clearing brokerages and a handful of other firms have been given direct access to the exchange, while hedge funds and most other non-clearing members have had to work through the big brokerages.

Starting later this month, Quadriserv's self-clearing brokerages will "sponsor" hedge funds for direct access. This would allow fund managers to work off the same trading screens as the major brokers - providing better transparency and price discovery.

Quadriserv, a New York firm backed by Bank of America, Bessemer Venture Partners, Citigroup, International Securities Exchange, Renaissance Technologies and other market players, launched AQS 10 months ago to provide a central electronic marketplace where short sellers and lenders can go to exchange securities. The key selling point of the exchange is that it increases liquidity and transparency while reducing counterparty risk, since all trades are cleared through Options Clearing Corp. In the past, securities lending and borrowing have been strictly private, bilateral transactions.

By all accounts, the exchange has been a hit with many market players. Starting with just four members, the exchange now counts 60 clearing and non-clearing members. Since January, the total volume of open trades has jumped by 33%. And Quadriserv expects rapid growth through 2010.

"AQS has seen steady growth in volume, order size and fill ratio," said Andrew Lazar, head of hedge fund sales for AQS. "Our March 15 closing balance was an all-time high."

Early next month, the firm plans to launch its first formal marketing campaign, which will include meetings with market players across the U.S.

Prime brokers were among the early adopters of the exchange, though several major institutions have been reluctant to join. "There's been tremendous resistance by a few important custodians and prime brokers with big securities-lending practices," said Ron Suber, head of global sales and marketing for prime broker Merlin Securities. The exchange "levels the playing field. It has enough well-capitalized backers and participants that it can succeed in spite of resistance."

Quadriserv expects the appeal of AQS will only increase as volume on the exchange grows. That's because with more volume comes even higher levels of transparency and liquidity. That, in turn, should reduce problems with stock recalls and rate changes, Suber said.

However, Sal Campo, head of prime-brokerage sales at Conifer Securities, sees limited growth potential. For now at least, the range of securities available on the exchange is somewhat limited. "It's not the entire securities universe," he said.

"The exchange will likely be valuable when it comes to trading liquid securities, but when someone is trading special or hard-to-borrow stocks, information is king," Campo said. "Exchanges won't be able to replace the value added by an actual securities-lending desk."

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