Corporate buybacks are on the rise, and that’s good news for liquidity-hungry buyside traders.
During the first six months of the year, there have been more buybacks authorized than during the first half of any year since the 2008 financial crisis, according to data from research firm Birinyi Associates.
Through the end of June, corporations authorized more than $411 billion in share buybacks, according to Birinyi. That compares to less than $256 billion authorized at the same point last year. To find anything close to this year’s numbers, you have to go back to 2007, when companies authorized about $417 billion in buybacks through the end of June.
Robert Leiphart, an analyst at Birinyi, said that after seeing stocks trend upward since the lows of 2009, corporate management is frequently looking for ways to return money to shareholders.
“Companies feel better about the financial picture, so they’re a little bit looser with their purse strings,” Leiphart said. “These companies need something to do with the money, and a buyback program offers the most flexibility.”
There are some alternative uses for that excess cash. Companies could issue larger dividends, for instance, or they could invest in their businesses, hiring new workers and expanding operations. In a still uncertain economy, however, buybacks seem to offer the least possibility of downside in the future.
Leiphart points out that if a company later has to reverse course, reducing a dividend or cutting back its workforce, there is typically a negative consequence for the stock price. On the other hand, if a company does not complete an authorized buyback, it rarely if ever has a negative impact on the stock. In fact, many authorized buybacks are never fully competed.
So far this year, corporations have actually executed a little more than $118 billion in buybacks, but Leiphart said he has seen an increase in the number of accelerated buyback programs, so the second half of 2013 could see a lot more repurchasing of shares.
The trend is providing opportunities for the buyside to interact with safe, quality liquidity that won’t lead to information leakage. This surge in buybacks could help institutional traders looking to move large numbers of shares without also moving prices.
Ryan Larson, head of U.S. equity trading at RBC Global Asset Management U.S., summed it up for the buyside. He said he is interested in accessing liquidity, from buybacks or from elsewhere, in a dark pool or on a public exchange, so long as he can avoid getting gamed.
“Right now, real liquidity is hard to find,” Larson said. “Whether it’s in a dark pool or a lit venue, we’re looking to avoid information leakage, prevent moving the market, and protect our clients against the adverse effects of high-frequency trading.”
There is a potential downside to buybacks, though. As companies repurchase stock, there are fewer outstanding shares trading in certain names. That means buybacks could ultimately hinder liquidity even as they provide liquidity in the immediate term.
“While buybacks do present real liquidity opportunities in the short run, they also reduce shares outstanding, thus potentially dampening the longer-run picture,” Larson said.
Companies want their buybacks to produce long-term shareholder value, not just create blips over the trading day. Consequently, they try to steadily buy back shares in small orders over the course of months and even years. Trades aren’t done all at once in big blocks.
The largest announcement so far this year came from Apple Computers. In April, the company pledged to repurchase an additional $50 billion in stock on top of the $10 billion buyback announced last year. That’s a total of $60 billion in buybacks. The massive program might not be completed, however, until the end of 2015, according to the company.
Buybacks always come with numerous restrictions and blackout periods to prevent companies from engaging in insider trading with their own stock. Most corporate treasurers tend to hand their buyback programs over to investment banks, where trading departments handle the details of execution.
At Barclays, the trading department has taken a more active stance in winning these deals. Bill Bell, head of electronic and program distribution at Barclays, has taken a lead in the firm’s buyback business. He told Traders Magazine that Barclays has an origination group that works together with its bankers to try to pitch its execution franchise to corporations with buyback programs.
Bell said when companies buying back shares meet up with institutions in the firm’s alternative trading system, both sides of the transaction benefit. Having corporate buybacks handled by the electronic trading side of the firm gives Barclays an advantage over competitors, according to Bell.
“I don’t know of any of my competitors where the heads of electronic and programs distribution are running the buyback business within that offering,” Bell said. “What’s differentiated is having it centrally located within our electronic side.”
According to Bell, Barclays has gotten a lot of positive feedback from corporate clients with share buyback programs. The firm’s dark pool, Barclays LX, is at the center of its efforts to win the business.
By pairing up corporate buyers with institutional sellers, Barclays hopes to avoid market impact for either player. For the firm, buybacks are another opportunity for providing high-quality liquidity to clients that use its dark pool.
Bell admits it has been difficult making institutional investors aware of the benefits of using its dark pool to find buyback liquidity. After years of low levels of buybacks, many traders on the buyside simply don’t think to look for buybacks when they’re searching for liquidity. Given the paltry share repurchasing programs announced in recent years, that shouldn’t be surprising.
Plus, at least one trading exec sees a dark side to buybacks. Joe Saluzzi, co-founder of Chatham, N.J.-based Themis Trading, said that with all of the specific rules companies have to follow when buying back stock, corporates can become easy pickings for high-frequency traders.
“It’s pretty easy to figure out where the lower limit is, where the buyback is,” Saluzzi said. “Don’t you think that they can spot a buyback program?”
The concern is that high-frequency traders can snatch up shares before they are bought back, then sell them to the company as soon as it starts buying back a large number of shares. That means quick profits for HFTs, and fewer liquidity opportunities for buyside firms that want to avoid interacting with high-frequency traders.
Barclays’ Bell says that is one reason why doing the trades in the broker’s dark pool makes sense.
The firm takes pride in the way it polices Barclays LX, now one of the largest dark pools in the industry. By keeping out players with abusive trading practices, Barclays hopes to make companies feel safe when they use the venue to buy back shares. At the same time, the passive liquidity from buyback programs appeals to buyside institutions fearful of being gamed by HFTs.
“The corporates are accessing good liquidity within our ATS, because the toxicity framework that we run makes sure that we have very good participants in our pool,” Bell said. “And our institutional clients want to trade into our pool because they know that corporate buyback liquidity is sitting there passively all day.”
That sounds like a win-win situation. And if the uptick in buybacks continues, buyside managers might just have more access to the type of safe liquidity they’re always seeking.
