Alternative Routes For Block Trades

vaibhav-sagarBy Vaibhav Sagar, Senior Technology Consultant, Open Systems Technology

A tech consultant reviews Eastpring Investment’s Sanjay Awasthi’s recent article about block trades.

The article by Sanjay Awasthi identifies the importance of block trade routing and examines various circumstances where it is conducted. It is particularly successful in making the following points:

Block trades, if executed correctly, provide optimal execution prices for liquid and not-so-liquid securities that are either widely- or narrowly-held by institutional investors.

  1. A given block deal quantity could be greater than multiple days of average daily turnover volume (ADTV) of widely/narrowly held securities, hence the need to broker a deal via block trade.
  2. The whole process of exploring undiscovered or hidden liquidity by checking the trading blotter of your clients, sending out indications of interest (IOIs) and also hidden orders (using ICERBERG strategy) is a very well designed way of implementing the liquidity search operation for block trades.
  3. Human agency is still necessary for some trade execution, especially using the skills of sell-side traders to fill difficult buy-side orders.
  4. There is a strong obligation to prevent information leakage and resist any market manipulation.

In general, the article does a good job at defining the scope of block trades, describing the technicalities and processes as well as emphasising the confidentiality aspects of executing block trades.

However the article could have been more comprehensive had it discussed the following topics:

  1. When a broker can locate both the buyer and seller of a block, how is the execution price decided?
  2. What role does the broker play if it only has the seller’s order: does the broker assume the role of deal maker and take the risk on its own books while it looks out for a buyer?
  3. An examination of other liquidity options, such as dark pools and unlit venues provided by exchanges, would have provided a fuller understanding of the routes for executing block trades.

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