Commentary

Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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June 3, 2013

Billion-dollar Blocks

How Merrill's Scott Bacigalupo and Rivals Move Massive Amountsof Stock Overnight to the Buyside

By Gregg Wirth

The phone call sometimes comes around 2 p.m.

That's when a large stock seller-either a corporation or, more likely, a private equity firm-will confirm to major Wall Street investment banks that it wants to effect a large overnight block trade. The possibility of such a trade may have been informally discussed within the banks' private banking sides for a few days. Some limited due diligence has been done, but now the deal is happening.

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The vehicle: a secondary offering of stock in a public company such as hospital operating company HCA Holdings or car rental outfit Hertz Global Holdings. The seller typically wants to move $1 billion or more worth of shares in such a well-known company, listed on a national exchange, after the market's close. The seller also wants Wall Street banks to bid on the shares, in a transaction known as an overnight block trade.

Immediately, the investment banks' syndication desks, due diligence groups and risk professionals scramble in the scant few hours remaining in the trading day.

The syndication desk will try to get a feel for which institutional investors would be potential buyers of the stock-a delicate dance, because the desk doesn't want to tip its hand that a large block of this particular stock is coming to market. The due diligence squads will again swarm over reconnaissance material, making sure there is nothing unknown about the seller, the stock or the trade.

John Paci, Morgan Stanley

Now armed with full details of the size and market price of the trade, the risk pros will distill dozens of factors-everything from the size of the block compared to the stock's outstanding float, to how close the sale is the to company's next earnings announcement. They mix the minutiae into a brew that determines a single number: How much will a bank-or group of banks-pay the seller for the entire block?

For the banks, the trick is to keep their heads and know the fundamentals. "When you're bidding on a block trade, you have to, one, know the story; and two, know the price levels where buyers care and you can move the stock," said John Paci, head of cash and ETF trading for the Americas at Morgan Stanley, who has been through this drill many, many times.