Block trading in Europe continues to spike as volatility sees risk commitment tail off

A drop off in bank’s risk pricing and appetite to show balance has led to block trading accounting for a quarter of the pan-European trading volumes in the second quarter.

Pan-European block trading volumes have continued to rise throughout the first half of this year on the back of ongoing market volatility.

Volatility caused by the Ukrainian conflict and the pandemic have affected institutions appetite for risk and for showing balance and this has seen a spike in block trading as traders look to move out of positions quicker through more immediate execution.

According to data sourced by The TRADE from big xyt, block trading has risen from 10% of the market and roughly $10.5 billion in average daily volume traded in the fourth quarter of 2021 to 19.6% and $14.7 billion in the first quarter of this year. This has continued to rise, peaking at 25% of the market and around $17.8 billion in average daily traded volume in the second quarter.

Conversely, the portion of the market traded on book (71%) and off book (29%) remained exactly the same from the end of last year to the start of this year when disregarding over the counter (OTC) content. In the second quarter the split changed to 40% off book and 65% on book.

“During times of low volumes, the amount of on order book trading reduces because there is less liquidity, leading to an increase in negotiated off book trading in blocks,” Richard Hills, head of client engagement at big xyt, told the TRADE.

As turbulence continues in the markets throughout this year, the appetite for risk has remained low, while tightening monetary policy and central banks pulling their funding across the globe have all contributed to the markets being less liquid.

“A big difference between the volatility of 2020 and of 2022 is the switch from risk trading to agency negotiated block trades, indicating that risk appetite is generally lower,” said Hills.

“We’ve also noticed a big drop off between the middle of last year and this first quarter in capital commitment to the market, although not in the electronic SI space. It makes sense, because the higher the volatility, the greater the risk of capital providers;  VAR increases and risk limits are imposed by the firm. Where can traders go? If they don’t want to trade on the market they can try to find a block cross.”

According to one block trader who spoke to The TRADE on the condition of anonymity some fund managers are more reluctant to use risk because of regulatory changes to the Mifid II framework.

“High frequency guys make the markets harder to trade from a traditional standpoint,” he said. “The liquidity you see at the touch disappears pretty quickly. That coupled with the fact that some of the banks have trenched away from risk pricing. They’ve cut their VAR or they’ve cut their appetite to show balance. Mifid has meant that some fund managers are actually shying away from using risk potentially if they can find natural. The use of balance sheet from the sell-side falls into a grey area because of Mifid.”