The block trade is back.
The buyside has told Traders over the years it wants to execute more block trades and in 2013 it did, according to a report from market consultancy Tabb Group. Block trading grew in 2013 to 12 percent of total trading volume from 11 percent in 2012.
Tabb attributes the growth to multiple factors such as the fact the U.S. equity market is settling down post-credit crisis and that equity correlations have declined back to historically normal levels.
Despite this growth, there had been confusion as to what constitutes a block trade according to Tabb. Historically, a block trade has been defined as an execution where 10,00 or more shares has traded. But Tabb founder Larry Tabb has attached a different definition to a block trade based on interviews with institutional investors.
Tabb said that based on interviews with institutional investors, a block trade is, or should be, defined as a single trade consisting of 20 percent of the average daily volume (ADV) in an instrument.
“Larger investors believe that 20 percent of ADV is a reasonable amount of volume that can safely, effectively be bought without incurring any negative market impact on price,” said Larry Tabb, founder and chief executive of the consultancy.
The findings of Tabb’s interviews can be found in its latest report, “Truing the Block: A Framework for Re-Architecting the Trader’s Toolkit,” co-written with research analyst Valerie Bogard. The 13-page report analyzes the roots of the current situation and recommends re-architecting true block trading. It covers such things as:
– 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.
The report noted that 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 explained, 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 (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 percent 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 said. “This compares with average trade size matched by exchanges, which was approximately 500 shares per trade in 2004, now below 200 shares today.”
The full report is available from Tabb at www.tabbgroup.com.
