Rob Swystun, Pristine Advisers
Corporate buybacks are on the rise.
There have been more buybacks authorized in the first six months of this year than the first half of any year since the 2008 financial crisis, according to research firm Birinyi Associates.
From January to June, corporations authorized in excess of $411 billion in share buybacks, Birinyi found. Compare that to under $256 billion for the same time frame last year.
Birinyi analyst Robert Leiphart told James Armstrong of Traders Magazine that corporate management often looks for ways to return money to shareholders since it has observed the upward trend in stocks since the low points in 2009.
“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.”
Because the economy is still uncertain, stock buybacks offer the least possibility of a drawback occurring later. Other options like issuing larger dividends, hiring more staff or expanding operations can lead to negative consequences for stock prices if a company needs to backpedal a bit. Reducing dividends or cutting back on the workforce will typically be negative for stock prices, but not completing an authorized buyback, on the other hand, rarely impacts stock negatively.
Despite how much had been authorized, corporations had only actually executed about $118 billion in buybacks through those first six months of this year, but the second half of 2013 could see things pick up, as Leiphart said he’s seen an increase in accelerated buyback programs.
For the buy side, this trend provides opportunities for garnering safe and quality liquidity and it could also help institutional traders move large numbers of shares without affecting prices.
For people like Ryan Larson, head of U.S. equity trading at RBC Global Asset Management U.S., this trend is definitely a good thing.
“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.”
It’s not all positive, however, as corporate buybacks also mean there are fewer outstanding shares out there to trade.
“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.
The whole point of buybacks is to cultivate long-term value for shareholders so companies generally try to consistently buy back shares in smaller orders over a long period of time rather than do it in large chunks.
For example, Apple announced in April of this year that it will repurchase $50 billion in stock, which, adding in the $10 billion buy back it announced last year, means that it has pledged to buy back $60 billion in stock by the end of 2015.
These buy back programs are accompanied by restrictions and blackout periods to prevent insider trading. The majority of companies tend to have a third party, like an investment bank, handle their buy back programs.
One such bank, Barclays, actively tries to procure these buy back deals by having an origination group that works together with its bankers to pitch its execution franchise to companies that are looking to perform a buy back.
Bill Bell, head of electronic and program distribution at Barclays, told Traders Magazine that having corporate buybacks handled by the electronic trading side of the firm gives Barclays an advantage over competitors.
“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.”
Barclays aims to avoid making a huge market impact by pairing up corporate buyers with institutional sellers while providing high-quality liquidity to clients that use its dark pool, Barclays LX.
Despite this, though, it has been a challenge making institutional investors aware of its dark pool, as many traders on the buyside don’t think to look for buybacks when searching for liquidity sources.
And one trading executive has spotted a dark side to these buybacks. (Dark liquidity, dark pools, dark sides …who knew buybacks could be so dark?)
Co-founder of Themis Trading Joe Saluzzi said that due to the stringent rules companies have to adhere to when exercising a buyback, they can fall prey to 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 danger here is that high-frequency traders will be able to swoop in and grab shares before they are bought back and then sell them to the company doing the buyback as soon as it starts repurchasing a large number of shares, resulting in quick profits for high frequency traders and fewer liquidity opportunities for buyside firms that try to avoid dealing with these high frequency traders.
That’s where Barclays LX really helps out with buybacks, Bell says, as the firm keeps out players with abusive trading practices. In doing this, Barclays aims to create a safe haven for companies when they use the venue to repurchase shares. The passive liquidity from buyback programs also appeals to buyside institutions wary of falling prey to high-frequency traders.
“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.”
Can you say win-win?