CEO Chat: Alan Hill, JonesTrading05.24.2017
The block trade is not dead. Not by a longshot.
While fragmentation might be a fact of modern-day equity market structure, the ability to source a sizable chunk of stock isn’t impossible, regardless of name. Jones Trading, headed by CEO Alan Hill, continues as one of the more prolific block trading firms. In a conversation with Traders Magazine, Hill talked about block trading and its future.
Hill is no stranger to the equity markets. He joined Jones in 2006 as the firm’s Chief Financial Officer and worked his way through the C-level suites until becoming CEO in 2015. Prior to Jones, Hill worked at KPMG, Jefferies and Korn Ferry. At Jones, he’s help spearhead the firm’s block-trading business and is involved in other new businesses the firm is engaged in, such as: outsourced training, prime services, capital markets and options trading. Despite the more recent focus on diversification, Hill and Jones still eye block-trading as the firm’s core business.
So how does Hill define the block? Is it still any single executed order of 10,000 shares or more?
“I think when it comes to blocks the 10,000 share number is a bit of an anachronism,” Hill told Traders Magazine. “We look at it from a much more sophisticated angle. “We look at blocks relative to average daily volume of the stock, how wide the spread is in the stock. And anything that is kind of 15% – 20% of the ADV of a stock we would look at as being a block.”
Hill explained further that a block could be 1,000 shares for a stock that very illiquid or it could be 100,000 shares to 200,000 shares for a liquid stock.
“We really try and look more at the size of the client order versus ADV in the stock,” Hill continued. “And then from a pre-trade perspective, we measure how much we would expect that size of an order to move the market.”
While block trading is assumed to be easier in more liquid stocks, what about small cap stocks? Is executing a client order of 20% to 35% of a stock that has a small float a sweeter trade for Jones ?
“I think we have the biggest impact and value in the small and mid-cap space,” Hill said. “If you look at the performance basis of how well a block trade performs, a block execution clearly outperforms in the small and mid-cap space. But there’s obviously value to executing blocks in large cap stocks too.”
But is block trading purely the realm of the largest money managers –– or is block trading for everyone?
“I think everyone trades blocks,” Hill began. “And our advantage is that we have a network of 1,500 to 2,000 clients – a really diversified client base. So, we can trade with traditional institutions, be it mutual fund or hedge fund. But also we trade a significant amount with private equity firms, venture capital firms, or corporations who are engaged in a buyback.”
And Hill relishes getting his client’s block trades done. As Hill puts it, finding natural liquidity, regardless of source, is the real success story of any firm or venue that focuses on block trading. And for Jones, it’s all about the human interaction between the firm’s sales traders and buy-side clients. Jones is 100% high-touch. If a client calls, a human picks up the phone and if given the order, works it.
“I don’t know how you would really trade a block low-touch, but I think if you want to compare us to say a Liquidnet, somebody that electronically trades blocks, this is our sweet spot,’ Hill said. “I think where we have a big advantage is the tremendous amounts of latent liquidity out there. Part of that may not be on the trading desk’s pad at the time you receive an order, but that’s where the high-touch aspect comes in. We can tap into that latent liquidity and source liquidity for people that they may not realize is there.”
For example, Hill recalled to Traders Magazine a time when the firm traded a 1.4 million share block of a stock for a firm with a market cap of $370 million. He explained that one might think the trade was a decent size but the stock only but sees 200,000 shares per day trade. Jones was able to find the size, from two buyers, in what equates to 10 to 15 days’ worth of volume, without moving the market. That’s what Hill wants – to execute quietly and naturally – with little to no market impact.
Hill said that Jones continues to grow its high-touch franchise not just in the U.S. but also in Europe, Canada via a Toronto-based broker-dealer and in Asia. And while the U.S. franchise that is the firm’s crown jewel , having global reach is increasingly important..
“I think realistically for our business, since our history in the U.S., this is the most important area for us,” Hill said. ”But, I think all clients have the same need all over the world and we try and satisfy that need. And the markets have gotten a lot more complicated and no matter where you trade, institutional clients with large orders all have a hard time accessing the liquidity they need. The buy-side cares about liquidity more than ever and it doesn’t really matter where we’re talking about, the need is all the same.”
So, what does he future of block trading look like?
“I expect block trading to increase,” Hill said. “As we have talked to clients I think most have said, ‘ I’m happy with where I am electronic versus high touch or in-house trading versus using brokers’. And the one area clients seem to talk about still is that they would like to execute more blocks. They want to access liquidity in size, so I would see that area of the market increasing over the next couple of years.”
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