(Bloomberg) — When Kent Rossiter seeks to place large orders to trade Asian stocks — a common scenario given his employer, Allianz Global Investors, is among the biggest asset managers — he finds computers are his allies.
To ensure competitors dont sniff out his plans and make it more expensive to buy or sell, Rossiter turns to platforms such as Liquidnet Holdings Inc. and Investment Technology Group Inc. In the old days, he wouldve used a human broker. The Hong Kong- based trader isnt alone, fueling a boom in volume at electronic block-trading systems — sometimes called dark pools — that give investors anonymity.
In finance, computers arent going away, even as they are dogged by concerns theyve made markets more dangerous. Scandals like the recent rigging of currency markets by bank traders bolster the case for taking people out of the equation. And Rossiter, wary of computers but wedded to them anyway, helps illustrate why a shift in trading is inevitable.
We find block-trading platforms very helpful in not leaving a footprint, so we can get some good size executed outside of the traditional exchange, Rossiter, whose employer oversees about half a trillion U.S. dollars, said by phone. There is limited human involvement in some specialized block trading platforms, so other than me on one side, and a contra on the other, theres limited chance of information slippage in executing our orders.
Pummeled Strategies
Block trades, transactions measured in, say, hundreds of thousands or millions of shares, have always required extra care because of the money at stake. Big investors turned to brokerages to facilitate the bulky trades with their own inventory or by matching them with other investors.
Liquidnet, ITG and others like them are the modern equivalents. Liquidnet, which has been hiring in Asia, expects its business to expand in the region this year. Its trades climbed 8 percent to a record $21.6 billion last year. ITGs block-trading business expanded 10 times to about $1.2 billion in cash equities trading in the fourth quarter of 2014 from the previous year.
Weve seen a tremendous growth although from a low base, said Ofir Gefen, the Asia Pacific head of electronic brokerage at ITG.
Rogue Brokers
Block-trading specialists have seen their business surge in the Asia-Pacific region as fund managers face pressure from regulators and clients to cut transaction costs. Some investors are also concerned that rogue brokers could use knowledge of their orders to make money by placing trades before the market- moving block is executed.
You dont really want to work with the brokers working against you, said Mark Konyn, who helps oversee $92 billion as the chief executive officer of Cathay Conning Asset Management Ltd. in Hong Kong. You want to keep things discreet, not have an impact on pricing.
Konyn uses a mix of traders for execution through his dealing desk. Cathay Conning would use block and algorithmic trading, when it has a large order or is shifting across an industry group, he said.
For companies like Liquidnet and ITG, I suspect that theyve got a very, very strong offering at the moment, and to the detriment to the classic full-service brokering offering, said Samuel Le Cornu, who manages about $3 billion in Asian equities at Macquarie Funds in Hong Kong. The key advantage these guys have is the costs.
Trading Renaissance
The average size of an Asian trade at Liquidnet, which added 32 firms as new clients in the region in a year, was about $1.1 million in 2014. ITG had an average transaction of $900,000 in the last quarter. By comparison, Hong Kong Exchanges & Clearing Ltd. had an average equity deal of about $8,000 last year, and the Tokyo Stock Exchange about $8,600.
We can see the renaissance of block trading, Lee Porter, the Asia-Pacific managing director at Liquidnet, said by phone. By trading a block in one go, it should reduce your market impact because there shouldnt be any leakage of information into the market.
Market participants are cautious about executing at exchanges, where transaction costs can be higher because of high-frequency traders aggressive strategies. For example, HFT firms account for as much as 50 percent of the value of all transactions at Japan Exchange Group Inc. Block trading accounts for about 6 percent of all equity transactions in the country, or about a half of the total volume executed away from the exchange, according to ITGs estimates.
The business has changed, said Brett McGonegal, executive managing director of Hong Kong-based advisory firm Reorient Group Ltd. He ran an Asian trading business for brokerage Cantor Fitzgerald LP until 2011. Where you used to pick up and call your friend first, or your trusted source first, now you go to the screen first.
