The State of Block Trading

Terry Flanagan

While there have been concerns from market participants that the traditional block trade is going by the wayside, some counter that it is just going through a shift.

“A block trade is dependent on the liquidity and circumstances of a particular stock at any given time,” Tim Mahoney, chief executive of dark pool operator Bids Trading, told Markets Media. “The complexity of a trade determines if it’s a block.”

But the average trade size by itself is not a clear-cut indicator of a venue’s penchant for block trading. If a security trades an average of 20,000 shares per day, then a 50,000 share block would be very complex and difficult to execute as a single transaction and thus would be broken up into pieces via algorithms and other methods. If a security trades 10 million times per day that 50,000 share block then becomes a lot less complex to execute.

“There is generally more liquidity in the large cap stocks and given the increase in technology, traders use a variety of electronic tools to trade those,” added Mahoney. It is in the small- and mid-cap names that traders use alternative trading systems such as a Bids or Liquidnet to complete complex orders.

Bids traded an average of over 90 million shares daily during May, and had averaged 86.5 million shares per day during the second quarter. When clients decided to use the Bids Trader service, the average execution size was over 26,000 shares.

Overall, Bids’ trading venue had an average trade size of 256 shares during the month of April, according to data from institutional brokerage Rosenblatt Securities. In contrast, a traditional block trading venue such as Liquidnet had an average trade size of over 43,000.

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

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 there are no official figures, industry observers estimate that there are some 40 or so alternative trading venues in the U.S. 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.

“The concept of a dark pool originated as a crossing network, meant for institutions to trade and limit transaction costs and avoid the noise of the marketplace running ahead of them,” Joe Saluzzi of institutional agency brokerage Themis Trading told Markets Media. “Liquidnet is a perfect example with an average trade side of 50,000 shares. That is a good crossing network. But what you have now are dark pools pinging each other and sending IOIs [indication of interest], you don’t need that. You need transparency.”

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