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Top wealth fund says half its stock trades now outside exchanges

[OSLO] Up to half of all shares traded by the world's largest sovereign wealth fund are bought and sold outside of stock markets in a bid to cut transaction costs, a fivefold rise since 2010, a senior executive at Norges Bank Investment Management (NBIM) said.

The manager of Norway's $873 billion oil fund is gradually moving away from automated trading in favour of a measured approach that even includes the services of stockbrokers, Chief Investment Officer for Asset Strategies Oyvind Schanke said.

In a recent report, NBIM argued that global stock exchanges are failing to meet the needs of large institutional investors as the race towards ever faster buying and selling is both unnecessary and costly, benefiting only high-frequency traders. "I believe more and more people realise that being part of the speed race is unnecessary ... We're seeking to slow things down," Schanke said in an interview with Reuters at the fund's head office in Oslo.

With more than 9,000 companies in its portfolio, NBIM owns on average 1.3 per cent of all listed shares globally. About 62 per cent of its funds are invested in stocks, while 35 per cent is in bonds and the remaining in real estate.

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In 2008 about three quarters of the fund's share trading was done via algorithms, but that number is now down to around 40-42 per cent, Schanke said. "We've cut back on it and are instead actively looking for liquidity," he added. "The cost of trading rose over time and only began to fall when we began to seek out blocks (of shares)."

Mr Schanke estimated that 40-50 per cent of the fund's share purchases are now done in large batches rather than in incremental trades of smaller stakes. As late as 2010, block trading made up only around 10 per cent of the volumes. "We've been worried by a rise in the cost of trading. We believe stock exchanges have been too focused on execution, the high speed and low latency," he added.

NBIM is also a co-founder of Plato Partnership, a trading platform being developed by banks, asset managers and brokers to enable the execution of large trades without alerting high-frequency traders to the intention to buy or sell.

The Plato consortium recently announced it was in talks with the London Stock Exchange Group's Turquoise unit to set up the planned trading site, or dark pool, to allow the anonymous trades. "Depending on the talks going well, this could move quickly. That's what we hope for," Mr Schanke said.

Stock market operators are also experimenting with so-called intra-day auctions of shares, allowing bigger trades than the smaller increments of stocks that are processed during normal trade. "Stock exchanges are becoming more responsive ... They see to a greater degree that the large customers are an important part of the market," Schanke said.