04.30.2012
By Terry Flanagan

Block Trading Parsed

Despite the ups and downs seen in the broader equities markets, dark pool block trading remains stout.

“Generally speaking, there is an increase in block volumes when market volatility is low,” said Tim Mahoney, chief executive of broker-dealer Bids Trading.

The first quarter of this year was Bids Trading’s second best quarter to date, with nearly 70 million shares traded per day. Only in the third quarter of 2011 did Bids experience a higher average daily volume figure, when it traded just above 74 million shares daily.

Bids Trading operates the Bids ATS, which is a dark pool for large block orders. Based in New York, it is owned by a consortium of financial institutions including Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse Group, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Knight Capital Group, Morgan Stanley, NYSE Euronext and UBS. A block trade is typically defined as an order to buy or sell 10,000 shares or more.

While block trading volume has remained solid, some of the statistics say otherwise. According to research from New York-based agency brokerage Rosenblatt Securities, average execution size at dark pools has declined substantially over the past few years, to the point where they are nearly the size of the average lit order.

“The average execution size in dark pools in March 2009 was 443 shares,” said Joe Gawronski of Rosenblatt. “In December 2011, it was 226 shares.” In contrast, the average trade size at a lit exchange is just under 200 shares.

Traders have become more comfortable in recent years with execution of their large orders by algorithm, according to Gawronski. Algorithms can break up large block orders into smaller fragments and move them in microseconds to the various electronic markets.

“I know there are a lot of new venues out there and I wish them success, but I really don’t think that blocks are coming back,” said Gawronski.

While there are no official figures, industry observers estimate that there are some 40 or so alternative trading venues trading equities, ranging from independently run systems like Bids or Liquidnet, to broker-dealer crossing pools such as Goldman Sachs’ Sigma X or Credit Suisse’s Crossfinder.

Consolidation in the dark pool space may even be a possibility if trading volumes remain depressed.

“We might see some consolidation if volumes continue to struggle,” said Gawronski. “We could see some among the independent dark pools, but it won’t be like the exchange space where seemingly everyone was merging. At what level is it efficient to continue running a dark pool if the volumes aren’t there?”

While some of the statistics may project a difficult environment for block trading venues, Mahoney at Bids Trading remains optimistic.

“For block trading, I continue to believe the keys are inflows into equity mutual funds,” said Mahoney. “Block trading is about making fundamental decisions. Right now there is not a lot of fundamental decision making going on, and, together with low fund inflows, it has slowed block trading activity. In a period where money is flowing into U.S. equities funds, you will have more to spend and more block trading.”

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