Job Growth Coming in Private Issue Trading

Systems to trade non-public securities are expanding, creating job openings for flow traders, settlement staff, market researchers and applications programmers.

The new systems, built by Nasdaq and a handful of banks and other players, are gradually introducing modern trading and settlement processes to what has been an opaque and slow-moving market. One proponent likens the movement to the birth of the high-yield bond market some 25 years ago.

Private and restricted securities "fit the same mold as other newly created asset classes," like high-yield bonds or bank loans, says Barry Silbert, founder and chief executive of Restricted Stock Partners in New York. "Think of all the jobs and all the opportunities that came out of those marketplaces."

Restricted securities are awarded as compensation or arise through private placements, mergers and reorganizations. They generally can be purchased from the original owners only by "accredited" investors, such as institutions and high-net-worth individuals. If the security or issuer isn't registered in the U.S., purchases are confined to "qualified institutional buyers" who control at least $100 million.

In recent years, the amount of such securities has soared as companies look to avoid the burden of public reporting requirements, and as more foreign entities tap U.S. capital markets. Last year more capital - $162 billion - was raised via private placements than the $154 billion total for all initial public offerings in the U.S., according to Nasdaq. There are $1.2 trillion in restricted securities outstanding from public companies alone, says Silbert, citing a Depository Trust Company estimate.

Parting the Curtain

Ineligible for public sale, these securities cannot change hands through well-developed mainstream channels like the New York Stock Exchange or Nasdaq. They traditionally traded behind a curtain, with each buyer, seller and broker thrown upon its own resources to find a party both interested and legally qualified to take the other side of a trade.

The new inquiry, trade reporting and execution networks promise to change that. In October, Restricted Stock Partners launched electronic trading on its two-year-old Restricted Securities Trading Network after securing funding from Pequot Ventures. Meanwhile, Nasdaq Portal recently won Wall Street's endorsement of its effort to brand itself as the industry standard for "the private offering, trading, shareholder tracking and settlement of unregistered equity securities sold to qualified institutional buyers." In June, Friedman, Billings, Ramsey & Co.'s FBR Capital Markets subsidiary upgraded its five-year-old platform for trading the securities.

RSTN's main market involves unregistered securities of publicly traded companies. In contrast, both the Nasdaq and FBR systems focus on securities issued under Rule 144A - often debt securities, along with equity sold by non-U.S. companies as a prelude to a public stock sale.

In November, a dozen global banks that were gearing up similar systems agreed to fold their efforts into Nasdaq's Portal, which now plans to re-launch in the first quarter of 2008 in an improved form.

By establishing centralized markets with transparent pricing and an ability to electronically track shareholders, the systems hope to bring more buyers and sellers to the table and facilitate liquidity and trading volume.

Skills in Demand

"There is certainly a demand for (individuals with) some background or expertise in the space," says Silbert. "We've been hiring pretty aggressively. We've doubled our staff in the past nine months."

RSTN now employs about 30 people. It's in the process of expanding a seven-person trading group, whose members play a role similar to NYSE floor specialists to bring buyers and sellers together without committing the firm's capital.

The company also expects to add clearing and settlement staff, researchers who can identify owners or potential owners of restricted securities to place on RSTN's prospect list, and information technology people who can build front-end trading interfaces that appeal to users.

As volume grows, Silbert sees even bigger opportunities coming within the buy-side and sell-side institutions that will trade restricted securities on his and other platforms. "As our trading institutions get more active, they'll need people in the back office who understand the processing of these transactions as well," he says. And unlike RSTN, trading institutions that take on proprietary risk will need people who can value less-liquid securities and plot trading and arbitrage strategies. "As more people learn about this space, there will be opportunities for traders, analysts, individuals who can understand corporate finance, banking, valuation activities...but who also understand how capital markets work."

RSTN currently has 400 users registered to trade on its network. It's handled about 1,000 transactions since inception in 2005.