Commentary

John Turney
Traders Magazine Online News

Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

Traders Poll

What is your favorite movie about trading?

Wall Street

23%

The Big Short

13%

Margin Call

6%

Equity

0%

Trading Places

38%

The Wolf of Wall Street

8%

Boiler Room

7%

Arbitrage

0%

Too Big to Fail

5%

Free Site Registration

April 1, 1998

Smaller Block Orders Eclipse the Superblocks: Capital Commitment, Natural Crossing and Home Cooki

By Michael L. O'Reilly

Also in this article

  • Smaller Block Orders Eclipse the Superblocks: Capital Commitment, Natural Crossing and Home Cooki

Superblock trades win praise and publicity on Wall Street. But these glamorous deals occur infrequently and only among a handful of firms, negotiated by underwriters and stock issuers long after the markets have closed.

Smaller block transactions, worked by a growing list of broker dealers, are eclipsing the well-publicized superblocks, and their volume is surging.

In the booming stock market, these block orders journey at breakneck speed from initiation to sell-side execution, with the help of busy institutional, sales and position traders.

"Capital is pouring into mutual funds and retirement accounts," said Bill Allyn, head of block trading at Jefferies & Company in Short Hills, N.J. "The surge in these smaller block trades is a function of the enormity of the capital involved in the marketplace."

Ten elite firms completed 337 transactions of 1 million shares or more in January and February, according to AutEx, the Boston-based provider of block-trading data. The rest of Wall Street executed only 98 similar-sized trades over the same period. (AutEx is a unit of Thomson Financial Services, parent of Securities Data Publishing, publisher of Traders Magazine.)

All told, AutEx reported an advertised volume of 725.32 million shares in block transactions of 1 million shares or more in January and February. By comparison, AutEx reported an advertised volume of more than 8.95 billion shares in trade sizes of 100,000 shares or more over the same period. Trades in those blocks were more evenly spread among Wall Street trading firms, with 40 percent of the volume traded away from the ten top-performing desks.

AutEx noted that there were 51,234 trades of 100,000 shares or more in January and February. Of those block trades, only 435 topped 1 million shares. In the same period twelve months ago, AutEx counted 41,110 trades of 100,000 or more shares.

"The stakes are getting bigger and bigger," Allyn said. "There is real power on the institutional side of the business."

Astoundingly, most block trades can be filled in a matter of minutes. In fact, some institutional desks have the liquidity to cross trades themselves, and their is a growing list of electronic communications networks (ECNs) with the liquidity to match orders away from the sellside.

"Institutions just need more avenues for trades," Allyn said, "because the stakes have been raised so much."

Typically, block trades are transactions in which a sell-side firm matches orders or commits capital to buy a block of stock 10,000 shares or more from an institutional client. The firm then sells the stock to institutional customers for a profit.

In a superblock trade, an investment bank buys a block of stock from a stock issuer or major shareholder at a discount. The investment bank then breaks the order into smaller parcels and sells them to institutional clients.

Because of the incredible capital involved in buying superblocks the largest deals require more than $1 billion in capital trades are worked by investment bankers and underwriters away from the trading desk

But smaller block trades are surging, and more sell-side desks are handling the record flow of orders from institutions.

A block trade begins with a portfolio manager sending a large order to its institutional trading desk. The order ticket walked to the desk, telephoned or transmitted electronically is often followed with broad instructions for the traders.