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John Turney
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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.

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February 16, 2009

Block Survivors

Movers of size forge ahead

By Peter Chapman

Also in this article

Algorithms may have toppled the block trade from its perch as the dominant form of trading among large money managers, but the desire to get size done quickly persists in the heart of the buyside trader. To his good fortune, a determined group of brokers and exchanges is forever trying to meet his needs with new services or improvements on old services.

The present is no different. Bulge bracket players are touting direct contact with their trading heads. Third-market dealers are boosting their rosters of small- and mid-cap stocks. New block crossing pools are forming. Small-order dark pools are adding block-trading features. Exchanges are bolting on crossing systems.

As of last month, for example, the New York Stock Exchange opened a new front in its battle with upstairs dealers for block trades with its New York Block Exchange. The joint venture with BIDS Trading will work in conjunction with the NYSE's displayed market and cater to those traders willing to compromise on price for immediacy.

Elsewhere, a dark pool birthed from third-market dealer Cantor Fitzgerald called Aqua Equities is catering to regional broker-dealers hoping to connect with money managers looking to trade small- and mid-cap names.

Bulge bracketeer Morgan Stanley offers high-level contacts on its trading desk to buyside desks provided they "open up" with their full trading needs. "Rather than just calling your direct coverage, or rather than just having the order working on the desk, the conversation may be with the head of trading or his or her lieutenant," says Michael Schaftel, Morgan Stanley's head of Americas Equity Distribution.

The block business isn't as robust as it used to be, of course. Prior to the switch to trading in penny increments in 2001, blocks accounted for half of all trades at the NYSE. That meant about 550 million shares per day. Last year, block trades done on the New York floor comprised about 16.5 percent of all shares, or about 280 million shares per day on average.

Many players say the block market is mostly an upstairs phenomenon, anyway, and has been so for a while. They attribute at least some of the decline in NYSE block prints to the practice of printing the trades on the Nasdaq/FINRA Trade Reporting Facility (TRF). Nasdaq says it doesn't know how many blocks in NYSE securities are printed there.

The data for Nasdaq-listed securities are complete, however. In 2000, a quarter of shares traded were done in block trades of 10,000 shares or more. That translated into about 430 million shares per day. During the first seven months of last year, block prints (mainly to the Nasdaq/FINRA TRF) account for 13 percent of all Nasdaq volume, or 255 million shares per day.

Blame algorithms for the drop-off in block trading. They have made the dearth of visible liquidity bearable in the post-decimalization world and are now considered highly reliable tools.

As for the future, algorithmic trading isn't going away, say the pros, but neither are blocks. Algorithms are very helpful, they say, but not in all cases. The buyside will always have a need to trade quickly in size.