Volatility Shakes Up Block Trading
"The traditional assumption is that volatility is generally not a good thing for block crossing network volumes," comments Justin Schack, VP, market structure, at Rosenblatt Securities in New York. "If the market is moving really fast, the benefit of waiting for a block counterparty to show up is balanced out by the risk that the market is running away from you and the potential for you to sustain market impact."
Buy-side traders acknowledge that the current volatility adds risk to trading large blocks in traditional crossing networks. "With the volatility in these markets, you're better off picking your spots, rather than just putting up the stock at one price," comments Andrew Weinberg, a trader with Dallas-based Brazos Capital, an asset management firm that specializes in small-, micro- and mid-cap stocks.
End of the Block?
Of course institutions still have huge orders to move. "We're not seeing the demise of the block trade," notes Weinberg. "I just think we're in different times now than ever experienced. I think the [trading] style changes."
Weinberg explains that he uses Liquidnet for block crossing, but also taps into OnePipe, an aggregator that reaches out to more than 30 dark pools, as well as Knight Direct's dark liquidity algorithm. "Personally, I think that block trading is risky in this type of volatile market," he says.
"I wouldn't say we're seeing the demise of the blocks," adds Larry Tabb, cofounder and CEO of TABB Group. "There are still blocks, but what we're seeing is a reduction in usage of blocks."
"A fair amount of blocks were done with capital [commitment], and capital is becoming more expensive for the banks and they don't want to take the risk," Tabb explains. "Second, because of intraday volatility, people are wary of putting up a block unless they have some sort of confidence in the short-term direction of the market. And third, the continued increase in algorithmic flow makes finding blocks harder as they are just being broken up in smaller pieces."
Regardless of the volatility, however, asset managers value the block crossing networks because they can match anonymously in these pools with natural contra-side counterparties, contends Vlad Khandros, an executive with Liquidnet's corporate strategy group. "There is a strong desire to execute blocks without moving the market," he says, noting that Liquidnet continues to see demand from institutions to execute 200,000-share and larger orders. "That hasn't changed. What has changed is the ability to source the liquidity. It has become a challenge for the large asset managers to source enough liquidity in the market to meet their demand."
While Khandros concedes that volatility has exacerbated the liquidity challenge, he points out that the typical trade size in Liquidnet is still 55,000 shares. "That's pretty good evidence that the size of those blocks is not changing," says Khandros, who adds that in 2008 Liquidnet executed more than 300 block trades of 1 million shares or more.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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