Secondary markets for private stock are beginning to command bank attention as they grow in size and importance. Today, over $1.5tn of wealth is held in late-stage, venture-backed private company equities globally, a number that has grown at a compounded annual growth rate of over 46% since 1997.¹ Secondary transactions are providing liquidity to shareholders globally at volumes commensurate to traditional exits via IPO or acquisition.
As major institutional clients of trading, capital markets, and wealth management groups increase their exposure to private markets, banks are seizing the opportunity to support their clients’ private market activity alongside traditional public equity functions. New risks accompany these new opportunities, and prominent among them is a bank’s need to ensure that it is transacting at the best available terms for its clients.
Without an exchange function it is often difficult for banks to track all of the securities about which a client may inquire. Showing inferior terms than competitors, or worse, transacting away from the market, is not a good option for sustaining business. To mitigate the transaction, reputational, and potentially regulatory risks associated with failing to achieve the best outcome for clients, many banks have turned to Zanbato’s inter-broker trading platform, ZX, to support fair markets for private stock and to protect buyers and sellers from suboptimal execution.
This heightened focus on execution is a byproduct of improved liquidity in private markets. Private secondary markets were traditionally characterized by deep fragmentation and low execution rates. Brokers commonly differentiated themselves simply by their ability to find counterparties; participants regularly transacted with the first available counterparty, rather than working to identify other potential counterparties that might not exist.
In a market where synchronous trades can and do diverge materially in price, banks operating under the old market paradigm are inevitably being out-competed and out-executed by banks with superior access to market data.
Today, private markets are quite different. Billions of dollars of stock in many individual private companies transact every year. A bank’s role has shifted to ensuring its clients achieve optimal execution against a deeper order book of potential buyers and sellers. A more extensive analysis of supply and demand curves has become critical to ensuring clients transact as fairly as possible. In a market where synchronous trades can and do diverge materially in price, banks operating under the old market paradigm are inevitably being out-competed and out-executed by banks with superior access to market data.
Banks have long relied on centralized, independent, inter-broker trading platforms to provide transparency into aggregated supply and demand curves. Inter-broker trading platforms are not brokerage businesses themselves, but rather support a membership of brokers who submit bids and offers to the venue on behalf of their clients. Individual orders are anonymized and the aggregated order book of tickets is opened to members to ensure transparency and facilitate optimal execution. Inter-broker venues are thus able to consolidate price and volume data across all brokered transactions without fear that entering orders will allow others to disintermediate transactions, ensuring that the full order book will be presented for trading.
Several other benefits of inter-broker trading platforms further explain why mature securities markets so often rely on such venues. Smaller tickets can be aggregated to satisfy minimum volume requirements of larger orders. Banks can identify and work trades where market participants are close to a match, but not matched. Banks anonymize orders through execution, important for many institutional participants. Participation of regulated banks on regulated venues enhances oversight.
As such, while ZX’s inter-broker model is unique to private markets, it is validated by history. The deepest trading markets for securities, after over a century of experimentation, have been built on inter-broker trading platforms. They serve as a proven mechanism to mitigate the transaction, reputational, and regulatory risks associated with suboptimal execution, thus supporting safer and fairer markets for banks and their clients.
Co-Founder & CEO, Zanbato
This communication shall not constitute an offer or the solicitation to buy or sell any securities in any jurisdiction nor does it constitute investment advice. Private securities are generally illiquid and there is no guarantee that a secondary market will develop for any private security. All securities transactions are effected through Zanbato Securities LLC, member FINRA / SIPC and operator of ZX, an SEC-registered Alternative Trading System.
 Pitchbook data; “late-stage” defined as companies valued at ≥ $500mn