March 18, 2010

With the growth of algorithmic trading slicing large orders into smaller chunks to be executed individually across fragmented equity trading venues and dark pools, institutional traders often ask, "Is the block trade dead?" The answer is emphatically, "No," according to Dmitri Galinov, director of Credit Suisse Advanced Execution Services (AES), whose most recent innovation involves marrying algorithms with block trades. In fact, Credit Suisse has seen an increase in block liquidity in the firm's CrossFinder ATS over the past six months, he reports.

In late 2009 AES enabled all of its algorithms to search for blocks in CrossFinder ATS, the firm's dark pool. It also created two aggressive block tactics, Block Finder and Block Finder+, that not only represent blocks in CrossFinder but also simultaneously sweep exchanges and third-party dark pools for liquidity. Currently, the block algos are available only for U.S. stocks, but the firm plans to deploy them globally, Galinov relates.

A first mover in developing algorithmic trading strategies, Credit Suisse AES set its sights on large blocks for two primary reasons, Galinov says. First, CrossFinder ATS had become one of the largest block venues on the Street. And second, the firm found a way to solve the ease-of-use problem for trading blocks.

"We already have native block liquidity in CrossFinder," explains Galinov. In December 2009 CrossFinder matched an average of 151 million shares a day (single counted), of which 13 million comprised blocks, he says. (Overall, CrossFinder is now the largest U.S. equity dark pool, followed by Goldman Sachs Sigma X, which trades 118 million shares a day, according to Rosenblatt Securities' Jan. 26, 2010, report.) On Dec. 17, 2009, Galinov points out, CrossFinder executed a record 91 million shares (double-counted) in block-size trades, which are defined as 10,000 shares or higher. In addition, he says, the average block size in CrossFinder is 20,000 shares. By comparison, Liquidnet, the institutional block-equity negotiation system, had an average trade size of 43,385 shares in December '09, according to the Rosenblatt report.

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Improving Workflow

But having the liquidity to support blocks was only half the battle. Credit Suisse AES also had to offer a solution that fit into traders' workflow.

One problem with current block-only venues, Galinov contends, is that traders have to submit orders and negotiate manually. "It's too much work," he says.

To make life easier for traders, Credit Suisse AES developed algorithms that combine the ability to work the order in the public markets while simultaneously trading blocks in CrossFinder. "We'll slice and dice an order according to the trader's parameters while simultaneously representing the unexecuted portion of the order in CrossFinder as a block," Galinov explains.

With a typical algorithm, if a trader submits a large order, the algo works a small portion of that order. When that portion is filled, the algo moves on to another portion of the order and so on until the entire order is filled. With Credit Suisse AES' new block algo functionality, a trader can work the market for a portion of the order while simultaneously seeking the other side of a block.

While allowing a trader to slice and dice an order to seek the best price, AES' BlockFinder also enables the trader to indicate that he's willing to pay, say, 5 cents above the prevailing market price to move a large block and avoid moving the market. Once that information is received, BlockFinder goes out to the market and sweeps the top-of-book destinations for Reg NMS purposes while simultaneously placing the block in CrossFinder.

"Under Reg NMS you can't execute a block by trading through the current market," Galinov explains. "The [AES] algorithms will satisfy the visible market while simultaneously putting up a block in CrossFinder. Then the algorithm would slice and dice [the remaining portion of] the order as it normally would."

Building Blocks

Credit Suisse AES' BlockFinder+ tactic goes even further in search of liquidity. It not only sweeps the exchange books and CrossFinder, it also simultaneously sweeps other block dark pools -- including BIDS Trading, Liquidnet H20 and the New York Block Exchange (NYBX). The Credit Suisse algo reaches out to non-block dark destinations, leveraging the firm's cross connectivity with Barclays LX, ConvergEx's VortEx and LeveL ATS, Galinov notes, adding that AES is connected to 30 dark destinations in which BlockFinder+ can look for block trades. "We don't limit ourselves to block-only destinations," he says. "If a trader looks for blocks in pure block dark pools, they miss an opportunity."

To make its algos even more attractive to buy-side traders, Credit Suisse AES has created customized versions for clients. "Some clients just want to go to CrossFinder for blocks; other clients want to go to other dark destinations," Galinov relates. In addition, clients also can define a block differently; and some want to sweep depths of books even though Reg NMS only requires the broker to hit the tops of books, he adds.

As an industry leader in algorithmic trading and operator of the largest U.S. dark pool, Credit Suisse AES would seem to have an advantage with block algos. But will other dark pool operators jump on the trend? "For this particular algo, it's tough to copy," says Galinov. "You need to actually have block liquidity."

ABOUT THE AUTHOR
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...