A model to support market efficiency
The art of a good stock picker is identifying companies in obscure parts of the market that have yet to reach their full value potential, or, when it comes to shorting, have artificially high valuations. But aside from this, another skill is being able to construct trades that move anonymously through the market without signaling to others what the portfolio manager is doing.
This is something that Wedbush Prime Brokerage excels in, supporting emerging managers who have the nimbleness and dexterity to trade smaller positions.
“A long/short equity manager might focus on an obscure pharmaceutical stock, for example – many of which Wedbush covers from a US equities research perspective – and utilise our research capabilities,” explains Sean Trager, who heads up Wedbush Prime Brokerage. “If they were going to engage that company directly for certain deal flow, we would be able to help the manager achieve minimal market impact to execute their orders.
“Part of what we offer, therefore, is anonymity. You’re not shopping orders to the entire Street. With Wedbush, managers use a small, independent trading desk to move quietly and efficiently through the marketplace.”
From a securities lending perspective, Wedbush acts as an independent intermediary to many of the larger lenders on the Street and has in excess of 100 relationships – ranging from global banks to retail brokers. In addition to this, Wedbush uses its own core inventory from its corresponding clearing business. “In many ways,” says Trager, “we’ve replicated the Bear Stearns model. We run correspondent clearing in tandem with PB and unlike the bulge bracket firms we have no proprietary trading.”
“Independence is key. We’re not competing with our clients. We simply act as a vehicle for them to access liquidity to execute their strategies in the open market, both on the long and short side.”
Trager speaks passionately about the important role he believes Wedbush and a handful of other small independent primes play in the PB arena. In his view, competition should be welcomed.
While bulge bracket firms are largely focused on larger money managers, they still have a foothold in the smaller manager space by working with introducing brokers (ie; BTIG, Weedhan, etc). Without self-clearing independent Prime Brokers like Wedbush, the industry would end up with only a handful of counterparties. This is a risk not only for money managers but also the markets. For example, in the wake of MF Global, managers street-wide were dislocated and markets fragmented.
“If you believe in free markets then you believe in competition. We believe that smaller hedge funds who seek alpha and find opportunities should be able to deploy capital seamlessly. If Wedbush and other small independent PBs left the space I think we’d be looking at a very different market. We’d see fewer small-cap and micro-cap companies being traded and large-cap companies would dominate the market (even more so than they do today),” suggests Trager.
Every morning, many large custodian banks send Trager numerous of names from within their stock inventory, which Wedbush then disseminates it to its clients, allowing everyone to make a spread and hedge funds to access liquidity. This is the essence of free markets.
Think of it as large institutions outsourcing their securities lending function to Wedbush.
“For us, it’s a case of prioritising relationships but also making sure there is an equal opportunity lending programme,” concludes Trager.