Low volatility, a strong equity market and an anticipated shift in assets from fixed income will provide institutional investors with an ideal US block trading environment, according to executives at leading venues.
Trading in US equities continues to be marked by a high proportion of off-exchange activity, which in September reached a record high of nearly 40% of overall volume, and a growing ability to trade in size. Meanwhile, changes to the competitive environment linked to new platform functionality may alter where asset managers execute blocks.
Brennan Warble, head of US sales for Liquidnet, told theTRADEnews.com that the buy-side’s propensity to trade blocks would remain linked to market fragmentation and the search for liquidity.
“We anticipate block trading to continue to perform strongly as institutional investors seek the ability to trade in size and avoid the on-going issue of fragmentation in US equity markets,” he said, noting volatility in particular as a precipitating factor behind solid block performance.
“Overall, the recent low volatility environment has also encouraged dark trading activity, which generally increases the amount of block trading occurring in the market,” he said.
Volatile beginnings
In November, the VIX average daily close dropped to its lowest level since February 2007, hitting 12.92 and constituting a 22.62% year-on-year drop, according to a report from broker Rosenblatt Securities. The same report shows off-exchange market share grew 19 bps to 37.5% of US equities trading, nearly the same record level reached in September.
Another macro trend may also dictate the buy-side’s ability to execute blocks: the US Federal Reserve’s moves to curb its monthly bond buying program, which recently dropped US$10 billion to US$85 million per month, is expected to force investors to shift assets from fixed income products to well-performing equities.
“We’ve only begun to see the impact of the expected shift from fixed income to equities and this will pick up as the strong market performance in 2013 continues into the start of the year, presenting significant opportunities for the US equities market,” Warble added.
According to Jamie Selway, head of electronic brokerage and sales for agency broker ITG, his firm’s block trading network POSIT Alert will continue the growth experienced in 2013. This, he said, will be linked to changes to POSIT that let users trade all markets connected to the platform from the same front-end.
Challenge set
Selway said the firm would extend the number of markets to which POSIT is linked in 2014, including adding two that are not covered by Liquidnet. Presently, POSIT accesses a total of 30 markets, all of which are within Liquidnet’s 42-market universe of coverage.
Overall, the POSIT dark pool, which includes the Alert block subsection, matched in November a daily average of 33.4 million shares (single-counted) according to an estimate in the Rosenblatt report. In a statement from ITG, it said overall it had executed a total of 2.9 billion shares with an average US daily volume of 141.3 million shares for the month of December. Selway added that POSIT Alert had maintained an average trade size of around 32,000 shares in recent months.
Selway said dealing with institutional clients on a one-on-one basis to tailor execution solutions was a key element to growing the firm’s block business.
“We’re doing a lot of work around conditional orders and that continues to be a major focus. This includes large quantitative clients or smaller asset managers with a large blotter size relative to the trading desk needing to automate their workflow to trade blocks,” Selway said.
A block trading service offered by Bloomberg in collaboration with block trading venue BIDS Trading has also attracted volume since its inception in September 2012. Figures released last week show the BPool service has reached an average block fill size of 40,000 shares across its 150 buy-side members and 5% of block trades in US equities executed on ATSs.
Like Selway, Jim White, global head of operations for BPool, told theTRADEnews.com he believes conditional orders will continue to find favour on the buy-side and boost block performance as asset managers look for greater functionality when executing in size.
“Conditional orders, and in particular the ability to rest orders in BPool to find a cross while searching for liquidity in other venues using a broker algo, is one factor why asset managers choose to execute on the platform,” he said, adding that institutional investors would continue to look for names outside the largest listed equities.
SME drive
“Around two thirds of BPool liquidity is in small- and mid-cap names and we anticipate this sector of block trades will grow as buy-side traders look for more liquidity in these stocks,” he said, citing a 2013 Bloomberg report that found seven in ten asset managers would prefer to execute in blocks if they could find the right venue.
But, White cautioned that despite a great year for US equities in 2013, strong market performance would not necessarily dictate how buy-side traders engage in block trading.
“Overall, there will always be demand for block liquidity regardless of market performance,” he said.