Q&A: JonesTrading Jumps Into Distressed Debt

Apr 21 2008 | 9:46am ET

Agency brokerage JonesTrading Institutional Services has recently ramped up its offerings to include distressed debt trading in an effort to offer clients an alternative to traditional capital intensive or electronic trading mechanisms. The firm has also recruited industry veteran Kerry Stein as managing director to head the new distressed debt group.

FINalternatives recently caught up with JonesTrading Chairman Packy Jones in New York to discuss the firm’s decision to expand into distressed debt and his plans for further expansion at the 33-year-old firm.

FINalternatives: Why did you decided to start trading distressed debt?

Jones: Our business is very simple. For 33 years, we’ve basically traded in equities. We’ve done one thing well over that time–put together block trades on an agency basis. We’re now migrating that model to instruments where we believe it will benefit institutions and hedge funds.

What we’ve seen is that our clients are going to tell us where to go and what to do. In the case of distressed debt, we’ve found ourselves trading a lot of distressed equities. It’s a difficult to trade product and, as in equities, we’re experts at sourcing liquidity in difficult trades. And since we were trading distressed equities, our clients were saying, “Why don’t you trade distressed debt, too?”

We have listened to where our clients are headed before and responded to them, so when we heard an increased demand for distressed debt, as an adjunct to our equity offering, we said, “Why not?”

The distressed debt trades in a similar way to equity, and we’ve brought in a team, headed by Kerry Stein, to focus on debt and build out the business to our current clients.

FINalternatives: Why does the distressed market appeal to you?

Jones: One of the reasons it became an interesting business to us is, with the advent of bond reporting systems, TRACE requires that you print these bonds so the whole world can see it. In the old days, they bought it at one price and sold it at another and no one knew what that spread was. The transparency makes it more difficult to put these big spreads on corporate bonds. We’re coming in to create liquidity in these illiquid markets, and that’s the opportunity we see.

FINalternatives: Did the difficult first quarter for the equities market affect JonesTrading?

Jones: We had a fabulous January and we were up in the first quarter over last year. I think we’re going to see volume go sideways or down a little, so we’re looking for other opportunities out there. One thing that we have seen which has been good for us is within the last year our market share is up about 30%.

FINalternatives: What do you do differently from your competitors?

Jones: In equities, we, like other firms, compete for order flow. Everybody is in the order flow business, but in 2007 we were able to construct these blocks with an average trade size 49,000 shares. So in that sense, I don’t think anybody in the space is putting together that kind of size.

We cover at least 500 hedge funds right now from big funds to small ones. We basically cover anyone who wants to trade a block of stocks and, as time has gone on, clients who historically have not traded blocks are now doing so.

We also trade options, again on an agency-only basis. A lot of these options have pretty big spreads and we’ve found that we’re able to operate in between those spreads, which provides a service to our clients.

We’ve always been an agency-only broker and never trade proprietary.  A lot of firms use order flow to manage risk. We don’t. We just try to get best execution for clients by putting buyers and sellers together. What we try to do is have no conflicts of interest with our clients so we don’t sell research and we’re not investment bankers.

FINalternatives: What other growth plans do you have for the firm?

Jones: We also have a recently formed capital markets group.  We’ve found that a lot of hedge funds and private equity funds have large positions that are difficult to move and we’re already helping them trade these large blocks of stocks with minimal price slippage.

Last year we did a capital raise with Friedman Fleischer & Lowe. We now have the opportunity to invest in something whether it is in Canada or an options business, we have the money to do so.


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