With demand for block trading rising now that the US equity market is settling down post-credit crisis and equity correlations have declined back to historically normal levels, TABB Group in new research estimates the percentage of institutional volume traded as a block increased from 11% in 2012 to 12% in 2013. Despite this growth, there had been confusion as to what constitutes a block.
Based on interviews with institutional investors, TABB believes that a block trade is, or should be, defined as a single trade consisting of 20% of the average daily volume (ADV) in an instrument. “Larger investors believe that 20% of ADV is a reasonable amount of volume that can safely, effectively be bought without incurring any negative market impact on price,” says Larry Tabb, founder and CEO at TABB who co-authored “Truing the Block: A Framework for Re-Architecting the Trader’s Toolkit,” with research analyst Valerie Bogard.
The 13-page report with 8 exhibits analyzes the roots of the current situation and recommends re-architecting true block trading. It covers:
- institutional share volume executed in block, 2007-2013
- top agency block-trading brokers in 2013
- block trading ADVs from 2001
- VIX vs. percentage of blocks over 100,000 shares
- how transaction cost analysis (TCA) pushes traders away from blocks
- actionable IOI usage.
During the past ten years, block trading, particularly in thinly traded small- and mid-cap equities, lost its place in the strategies and styles of institutional traders but as Bogard explains, conditions that led to the current environment are evolving. Revitalization of block trading is not only is important but trends – specifically HFT scrutiny, maker-taker pricing pilots and the possible expansion of the spread in small caps – indicate that the benefits and opportunities for performance improvement (read: alpha generation) may soon be recaptured, albeit in a redefined sense of what constitutes a block.
To satisfy the recent demand for blocks, new electronic block trading platforms launched in the last year, including a new block crossing network, a flurry of actionable indication of interest (IOI) products and larger size-based conditional orders. However, although many buy-side traders receive actionable IOIs, nearly 75% choose not interact with them electronically, instead calling their broker. “As a result, off-exchange trade size has declined from approximately 1,500 shares per trade to about 325 in 2013,” Bogard says. “This compares with average trade size matched by exchanges, which was approximately 500 shares per trade in 2004, now below 200 shares today.”
Changing the architecture of a trader’s current toolkit will not be easy or quick, Tabb says. “Nothing that requires that kind of redesign to its framework could possibly be solved with an instant remedy, but if the market doesn’t recognize these obstacles in reviving block trading, it will be nearly impossible to do so fully.”
The report can be downloaded by TABB Group Research Alliance Equity clients and qualified media. For the Executive Summary or more information, visit www.tabbgroup.com. To purchase the report, write to info@tabbgroup.com.
