Block Trade: Endangered species or old habit?

Christian VoigtCurrently, MiFID favours block trades by granting them privileges that regular sized trades do not receive. A block trade between two institutional investors is treated rather like a Sumatran elephant that is way up on the red list of threatened species. Regulators protect block trades by allowing for pre-trade transparency waiver and delayed post-trade reporting. At the other end of the scale is the small trade (only a few shares) between a VWAP algo and a high-frequency trading firm. These small trades are treated like common midges with regulators giving them no protection. Instead they pull out the insect repellent, as seen in the latest ESMA guidelines for automated trading environments. I couldn’t help but wonder, then, where does the obsession with size come from?

Most importantly, the buy-side keeps telling us that size matters. Since the customer is king and the buy-side sits at the top of the food chain in financial markets, everyone loves size. But the question is, is the obsession with size more than just a resistance to change in existing processes? Do we all love size only because it was good in the past?

If I want to trade a large equity position within a week, what can I do? I can either spend 5 days on the phone searching for a counterparty and negotiating a price, or I can put it into my BlueBox algo and let the mathematicians do their work. A favourite argument against algo trading is the likelihood of detection by predatory HFT firms and the resulting adverse price movement. Yes, that risk exists. But it is also possible that some of my so-called “broker friends” might do the same thing once I start to negotiate a price with them. Thus, in both cases there is a risk of adverse price movement and I must manage it carefully.

Additionally, the processing of a block trade is rather simple. There is one counterparty, one price, no (or at most one) CCP and one settlement location. In contrast, a large trade executed via our BlueBox algos may execute at many different prices, on many different trading venues, with different post-trade processes (i.e. clearing and settlement). It takes some effort to piece that puzzle back together, but nowadays technology can do this very efficiently and cheaply. Fragmentation may have been an issue in the past but it should not be now.

Therefore, I wonder whether block trades are more like old habits that die hard than endangered species. Maybe markets could be more efficient if buy-sides stop clinging to the good old days when large block trades were free to roam the wide savannah of financial markets. For one thing, we could massively decrease the complexity of MiFID once the balancing act between old habits and the modern world disappears and we fully embrace the new opportunities that technology offers us. So far, the decrease in average trade size has been depicted as a negative by-product of increased HFT activity. But maybe this interpretation is incorrect and the decrease in average trade size is in fact the result of increased technological efficiency. That would be something positive that we should embrace.

Leave A Comment

Copyright © 2017 Fidessa group plc. All rights reserved.

The information contained within this website is provided for informational purposes only. Fidessa will use reasonable care to ensure that information is accurate at the time it is made available, and for the duration that it remains on the site. The information may be changed by Fidessa at any time without notice. We also reserve the right to close the website at any time. No representation or warranty, expressed or implied, is given on behalf of Fidessa or any of its respective directors, employees, agents, or advisers as to the accuracy or completeness of the information or opinions contained herein or its suitability for any purpose and, save in the case of fraud, all liability for direct, indirect, special, consequential or other loss or damages of whatever kind that may arise from use of the website is hereby excluded to the fullest extent permitted by law. Any decisions you make based on the information in this website are your sole responsibility and information on the website should not be relied upon in connection with any investment decision.

The copyright of this website belongs to Fidessa. All other intellectual property rights are reserved.

Reproduction or redistribution of this information is prohibited except with written permission from Fidessa.