As stocks tumbled last week, an unknown institution sold more than 10.5 million shares of an exchanged-traded fund that tracks the S&P 500’s real estate sector.
The $333 million securities dump represented 7.4 percent of outstanding shares of the Real Estate Select Sector SPDR Fund, a macro indicator of the industry’s largest companies. The May 12 trade — a dark-pool transaction priced at $31.54 per share — expressed a lack of confidence in the industry, experts say.
“That is obscene. It would be like Warren Buffet selling Delta all at once,” said a market insider who spoke on the condition of anonymity. “A very large institution is expecting widespread weakness across the real estate market, more so than is already perceived.”
Holdings in the fund, which uses the ticker symbol XLRE, include real estate investment trusts such as industrial landlord Prologis, Sam Zell’s Equity Residential and AvalonBay Communities, among others. (Mortgage REITs are excluded.)
At least half of its shareholders are major institutional investors, among them BlackRock Financial Management, Bank of America’s investing unit Merrill, and British Airways’ pension fund manager, banking documents and public filings show.
Despite its size, the trade escaped the notice of most investors, analysts and industry insiders because it was not made on the NYSE Arca, the exchange where XLRE is publicly listed. Instead, it occurred in one of the 53 dark pools registered with the U.S. Securities and Exchange Commission.
Dark pools, or alternative trading systems, are private exchanges where investors trade large volumes of securities in single transactions. Proponents say they enable an investor to buy and sell large blocks of shares at a fixed price, as opposed to in real time on public exchanges, which can cause prices to move against the investor while the large trade is happening.
Dark pools are owned and operated by investment banks including Goldman Sachs, Morgan Stanley, Bank of America, CitiGroup and JPMorgan Chase.
Though dark pools are legal and regulated, they are only required to report the transactions, not the identities of the parties. There are no public records of individual trades.
The closest the public can get to seeing what occurs in dark pools are summaries reported by the Financial Industry Regulatory Authority that aggregate a week’s transaction activity in each registered dark pool. The reports are published at least two weeks later.
Dark pools have been criticized for a lack of transparency which some say exposes investors to predatory behavior from high-frequency traders and major institutions.
Former New York Attorney General Eric Schneiderman led a campaign to combat what he called Insider Trading 2.0 with a focus on fraudulent operations of dark pools. It resulted in Barclays and Credit Suisse being ordered to fork over over $154 million in penalties and repayment of ill-gotten gains in 2016.
For anyone willing to pay, however, subscription data feeds will show dark-pool trades of publicly listed stocks in real time, as they are reported to the exchanges where the stock is listed. These feeds show the size of the trade and price per share, but do not identify the parties or the pool.
The trade of 10.55 million shares of XLRE was confirmed for The Real Deal by Stefanie Kammerman, a former trader at Schonfeld Securities, from a dark-pool data feed. Kammerman wrote a book on dark pools and continues to monitor such transactions, though now she focuses on teaching.
“It’s very odd there’s anything big on [XLRE],” she said. According to State Street Global Property Advisors, the fund manager of XLRE, its daily traded volume averages around 6 million shares over the past year.
Kammerman said that the 10.55 million shares were sold below market price, a common occurrence for securities that don’t have a high daily trade volume. She also noted that about 20 minutes before the Tuesday trade, an entity sold 991,700 shares of XLRE at the same price, $31.54 per share, in a similar dark-pool transaction. The ETF was trading around $32.45 Monday afternoon, up nearly 5 percent on the day.
Though it’s unclear if the Tuesday sellers are linked, together the transactions represented over 11.5 million shares of XLRE, or 8 percent of the fund at the time.
Kammerman said the XLRE trades were not an isolated incident. That same day, for example, she saw “massive” trades of various exchange-traded funds across all 11 sectors of the S&P 500, not just real estate.
“It looks like somebody’s dumping everything in my opinion,” she said. “There’s something very big going on.”
Tuesday was the first of two consecutive trading days where the S&P 500 index fell, the first back-to-back down days since March 23. It coincided with the start of the Federal Reserve Bank of New York buying corporate-bond exchange-traded funds — a first for the Fed, which announced the emergency measure as a way to quickly inject funds into the financial system in light of the coronavirus pandemic.
According to a record of dark-pool trades on May 12 shared with The Real Deal, the trade of 10.55 million shares of XLRE was the largest transaction of the day.
State Street’s head of research, Matthew Bartolini, called block transactions “business as usual.” He declined to comment on the seller of XLRE shares, but admitted that “whomever traded it is expressing a fundamental viewpoint on the real estate market.”
Bartolini said he was not surprised that an institution was betting that real estate stocks would drop. His team ran a historical analysis of which sectors performed best and worst in recessions going back to 1960, and found real estate consistently on the bottom.
“Investors are going to reallocate their portfolios,” he said. “[And they] will put a great emphasis on higher income growth, more defensive sectors.”
Neena Mishra, an analyst who leads ETF research for Zacks, also said the trade does not indicate anything new. Zacks clients are mainly retail investors and Mishra said she was already advising against investment in funds centered on real estate companies.
“Real estate is one of the worst performing sectors this year,” she said, pointing to XLRE’s share price, which at that point had fallen almost 19 percent this year. She attributed that to the effect of the coronavirus on rent collection and commercial occupancy, among other things.
“We look at the fundamentals and fundamentals are bad. There’s no doubt about that,” said Mishra.
Write to Erin Hudson at [email protected]