Superblock trades win praise and publicity on Wall Street. But these glamorous deals occur infrequently and only among a handful of firms, negotiated by underwriters and stock issuers long after the markets have closed.
Smaller block transactions, worked by a growing list of broker dealers, are eclipsing the well-publicized superblocks, and their volume is surging.
In the booming stock market, these block orders journey at breakneck speed from initiation to sell-side execution, with the help of busy institutional, sales and position traders.
"Capital is pouring into mutual funds and retirement accounts," said Bill Allyn, head of block trading at Jefferies & Company in Short Hills, N.J. "The surge in these smaller block trades is a function of the enormity of the capital involved in the marketplace."
Ten elite firms completed 337 transactions of 1 million shares or more in January and February, according to AutEx, the Boston-based provider of block-trading data. The rest of Wall Street executed only 98 similar-sized trades over the same period. (AutEx is a unit of Thomson Financial Services, parent of Securities Data Publishing, publisher of Traders Magazine.)
All told, AutEx reported an advertised volume of 725.32 million shares in block transactions of 1 million shares or more in January and February. By comparison, AutEx reported an advertised volume of more than 8.95 billion shares in trade sizes of 100,000 shares or more over the same period. Trades in those blocks were more evenly spread among Wall Street trading firms, with 40 percent of the volume traded away from the ten top-performing desks.
AutEx noted that there were 51,234 trades of 100,000 shares or more in January and February. Of those block trades, only 435 topped 1 million shares. In the same period twelve months ago, AutEx counted 41,110 trades of 100,000 or more shares.
"The stakes are getting bigger and bigger," Allyn said. "There is real power on the institutional side of the business."
Astoundingly, most block trades can be filled in a matter of minutes. In fact, some institutional desks have the liquidity to cross trades themselves, and their is a growing list of electronic communications networks (ECNs) with the liquidity to match orders away from the sellside.
"Institutions just need more avenues for trades," Allyn said, "because the stakes have been raised so much."
Typically, block trades are transactions in which a sell-side firm matches orders or commits capital to buy a block of stock 10,000 shares or more from an institutional client. The firm then sells the stock to institutional customers for a profit.
In a superblock trade, an investment bank buys a block of stock from a stock issuer or major shareholder at a discount. The investment bank then breaks the order into smaller parcels and sells them to institutional clients.
Because of the incredible capital involved in buying superblocks the largest deals require more than $1 billion in capital trades are worked by investment bankers and underwriters away from the trading desk
But smaller block trades are surging, and more sell-side desks are handling the record flow of orders from institutions.
A block trade begins with a portfolio manager sending a large order to its institutional trading desk. The order ticket walked to the desk, telephoned or transmitted electronically is often followed with broad instructions for the traders.
"I always try to tell the desk how price-sensitive the order is, or how quickly the trade needs to be made," said Darcy MacLaren, a portfolio manager at Safeco Asset Management Company in Seattle. Managing $1.7 billion in assets, MacLaren has an average position size of $128 million or 400,000 shares.
"I tell our traders what I'm trying to do," she added. "When the market is moving, they give me their trade projections. The trading desk can be my eyes and ears to the market."
Once on the trading desk, the buy-side trader will survey market conditions to determine how best to handle the block order.
First, the buy-side trader will check AutEx and ECNs to establish a sense of how that stock is trading. If the liquidity is available on one of the ECNs, the trader can immediately fill the order.
For a clearer indication of an over-the-counter stock's activity, the trader can call a market maker. On a listed trade, the buy-side trader will ask a floor broker to check the specialist post, hoping for a report on the buyers and sellers with interest in that stock.
"From the market maker or the floor broker, I want to get a feel for how that stock may trade," said Brian Pears, head of trading at San Francisco's Wells Capital Management. Pears' five-trader desk handles blocks as often as 25 times a day. "AutEx and ECNs can't always capture what is happening in every stock," Pears said.
Once projections have been made, the institutional trader will contact a sell-side sales trader to begin working the order. "Sales traders are our representatives on the sellside," said Bob Rasile, head trader at First Union National Bank of North Carolina in Charlotte. "It is the sales traders we forge relationships with. We have to trust them with our orders."
When working an order to the sellside, an institutional trader must always be wary of negative market impacts.
If information is leaked that there is a potential buyer of a large block of stock, that stock's price may climb as other traders scramble to buy available shares, hoping to sell later as the price continues to climb. Unscrupulous sell-side firms may be less guarded with client confidentiality and allow information to spread.
"There is always a risk of market impact when you go through a broker dealer," said Stephen O'Neil, head trader at ARCO Investment Management Co. in Los Angeles. "Once the sales traders get involved, information can spread on the desk that there is interest in that stock. You have to trust that broker dealer not to leak trade information."
O'Neil whose desk handles several blocks each day may expose only two-thirds of an order to a sales trader, waiting to see how that stock will trade while retaining control over the rest of his order. But when the order is time-sensitive and an execution is urgent, O'Neil must risk market impact to get the trade executed quickly.
"The need to get in or out of a stock quickly may take precedence, and I may have to be more aggressive" O'Neil said.
When a block order can be worked more leisurely, the institutional trader may break the order into smaller parts, hoping to lower execution costs.
When working an order to a trusted broker dealer, a buy-side trader will be honest to a point about the size of the block.
"I try to always talk to the sales traders in ballpark figures," Rasile said. "If they have a natural cross, it is best for them if they know about how large my order is."
How quickly the trade will cross a natural sell order matching a natural buy order depends not only on the stock's liquidity and the price at which the stock is trading, but also on whether the price of that stock is climbing or falling.
"When the market is hot and I'm selling, I may not want to hit every bid I see because I can often get a better price," O'Neil said. "But in a down market, I listen to any bid that is close to my offer because I have to go with the market."
Buy-side traders usually work a block order to one sell-side desk. Breaking the order up and working it to different desks can create the appearance that there are multiple buyers or sellers in the marketplace, which may move the market.
"Breaking up a block does give you more flexibility," said Ken Ducey, head of trading at BT Brokerage in New York, an agency trading subsidiary of Bankers Trust. "But to keep market impact at a minimum, it is important to limit the broker dealers you work those orders to."
The buy-side desk must have a strong relationship with their broker dealers because they may need a capital commitment to get their order executed. When the sales trader is unable to find a natural cross for the block, the buy-side trader will often ask to have capital committed the sellside taking the other side of the block trade to fill the order.
Capital commitments happen more frequently for OTC orders because of the nature of the dealer market. Working a block order, a buy-side trader will send that order to a market maker specializing in the particular stock. And if the market maker does not cross the order with another customer, the market maker will act as a principal and fill the order.
On listed orders, a block trade is worked by a floor broker acting as an agent at the specialist post. If the floor broker is unable to find a cross at the post, the broker will approach the specialist to take the other side of the order.
On the sellside, sales traders juggle numerous block orders for their customers. Helping to execute trades for their clients, they communicate with the other sales traders on their desk, hoping to cross their clients' block orders.
"We shop bids and offers to our clients, working to get two sides of a trade to agree on a price," said Chuck Mercein, a sales trader at Furman Selz in New York.
Typically, two sales traders on the desk will come together to cross an order. The head position trader will oversee the cross to ensure best execution.
But recently, Mercein was able to cross a 100,000 share order between two of his own clients. Traders nickname the work on those unusual trades "home cooking."
The position traders must be involved in the executions arranged by the sales traders. "The head of the desk knows if we can commit capital, whether we are long or short in that stock and how that stock is trading," Mercein said.
Ultimately, it is the position traders decision to commit capital to fill an order that has not been crossed.
"When my sales traders have really covered the waterfront and can't find a cross, we tell the account we can't find the other side," said William Sulya, director of Nasdaq trading at St. Louis-based A.G. Edwards. "But as long as the buyside allows us to continue working that order, we will protect that block order on volume."
When protecting an order on volume, Sulya said his sell-side desk will commit capital and fill a block order if a block of the same stock is trading away from the desk. This encourages a customer not to send the order to another sell-side desk.
Said Sulya: "You have to acknowledge the risk the client has taken by not looking elsewhere for a natural cross."
A broker dealer is usually more willing to commit capital for a long-standing client. "Brokers are taking a more holistic approach to block trades," Allyn said. "You have to look at all functions of the relationship underwriting, research, offerings when committing capital for a trade."
In the end, it is the sell-side trader's job to fill the orders coming across the desk. Broker dealers build their reputations by providing speedy and low-cost executions. Institutions are more likely to send their orders to a desk with a solid base of satisfied buy-side customers.
"I told my team the other day that the bottom line is being an action-oriented trader," Sulya added. "We have to pull out all the stops to consummate every trade that comes across the desk. Quality execution will only bolster our relationships."
AutEx Block Transactions
Listed Securities of Top 25 Brokers
Trades of 100,000 Shares or Greater * Jan. 2, 1998 Through Feb. 27, 1998
Rank & Broker Dealer Advertised Volume # of Trades
1 Merrill Lynch & Co. 835,624,800 4,836
2 Goldman, Sachs & Co. 739,280,700 3,434
3 Morgan Stanley 667,643,7003,810
Dean Witter, Discover & Co.
4 Lehman Brothers 641,370,100 3,243
5 Donaldson, Lufkin & Jenrette 614,302,600 3,370
6 Smith Barney 613,832,000 3,960
7 CS First Boston 405,210,100 2,280
8 Bear, Stearns & Co. 395,212,900 2,191
9 SBC Warburg Dillon Read 258,351,500 847
10 Sanford C. Bernstein & Co. 229,472,500 1,286
11 PaineWebber 201,189,500 1,308
12 Schroeder Wertheim & Co. 190,001,700 1,135
13 Nationsbanc Montgomery Securities 189,436,000 1,099
14 J.P. Morgan & Co. 184,065,500 1,133
15 Prudential Securities 167,205,100 1,030
All Other Firms 2,620,935,400 16,272
Total 8,953,134,100 51,234
Source: AutEx AutEx Block Transactions
Listed Securities of Top 25 Brokers
Trades of 1,000,000 Shares or Greater * Jan. 2, 1998 Through Feb. 27, 1998
Rank & Broker Dealer Advertised Volume # of Trades
1 Goldman, Sachs & Co. 141,699,000 85
2 SBC Warburg Dillon Read 89,270,000 44
3 Lehman Brothers 73,313,000 49
4 Donaldson, Lufkin & Jenrette 69,089,000 27
5 Merril Lynch & Co. 59,929,000 39
6 Bear, Stearns & Co. 34,947,000 21
7 Morgan Stanley 28,432,000 23
Dean Witter, Discover & Co.
8 CS First Boston 26,843,000 19
9 Nationsbanc Montgomery Securities 20,611,000 12
10 Smith Barney 19,874,000 18
11 J.P. Morgan & Co. 17,775,000 9
12 Salomon Smith Barney 15,851,000 7
13 Nesbitt Burns 12,700,000 8
14 Schroeder Wertheim & Co. 11,818,000 8
15 Santander Investment Securities 10,250,000 6
All Other Firms 92,919,00060
Total 725,320,000 435
Source: AutEx
