Electronic trading is sweeping the industry, but when it comes to illiquid stocks, human beings remain important at some of Wall Street’s largest firms.
Human beings still handle more than 50 percent of Citigroup’s institutional order flow. Another 22 percent is executed through program trades, and the rest through algorithms and direct market access. “You won’t find four times the daily liquidity by going through an algorithm,” said Tim Reilly, managing director and head of North America electronic execution sales at Citigroup, speaking at a conference.
Capital commitment remains “the fastest way to get an illiquid stock done,” Reilly said at Liquidity 2007 in January. “Clients are lookingfor venues that offer concentrated liquidity to execute their most difficult names. Frequently, a reliable sales trader is the best method to tap into this concentrated order flow.”
Dark pools can be good execution options, Reilly observed, but their hit rates tend to be low. And even if a trader with a 50,000-share order in a thin name executes 5,000 in Liquidnet, POSIT or another system, there are 45,000 left. Algorithms that access the displayed markets are also of limited use when it comes to illiquid blocks, Reilly said.
Besides sales trading, good ways to execute difficult names are through program trades and blind portfolio bids, Reilly said. In the latter case, a trader submits a portfolio with risk and volume characteristics for its constituent stocks to one or more brokers, who then bid on the portfolio. Reilly said the pricing for illiquid stocks in blind bids is good because the risk is spread out over the portfolio.
