It's no secret that buy-side institutions are having a hard time executing large blocks of stock in sizes of 10,000 shares or higher. Under the current market structure, institutions often shred their orders into smaller chunks to avoid leaking information to brokers or specialists and moving the market. "Trade sizes are definitely [being executed] smaller, and you can end up having your order nibbled to death," says Miranda Mizen, senior analyst in TowerGroup's Securities and Capital Markets Group. "That's not the way you [want to] trade a block. You'd rather negotiate it" and meet at the midpoint of the bid/ask spread, advises Mizen.
There is no shortage of electronic block-execution systems aimed at helping buy-side institutions match large buy and sell orders against one another [see sidebar]. Now, two newcomers are entering the space: Instinet Continuous Block Crossing (CBX) and Pipeline from Pipeline Trading Systems.
On Feb. 9, Instinet launched CBX, an institutional block-trading platform for U.S. securities, which works in conjunction with the company's Proactive SmartRouter, an advanced order-routing facility. CBX gives institutions the ability to trade blocks of large equity orders directly and anonymously, while allowing them to simultaneously represent the remaining shares of their limit orders on major electronic-communications networks (ECNs) and the NYSE.
Mike Plunkett, president, Instinet, North America Division, believes CBX has liquidity on its side, given that Instinet trades about 99 million shares a day and has 1,000 institutional clients. "We're not the first ones to think about crossing large blocks with natural liquidity, low market impact, anonymity, all those things," says Plunkett. "The downside is that, at times, you're temporarily out of the market," he adds, meaning that when a portion of an institutional order is waiting for a match in CBX, that portion is not exposed to the exchanges or ECNs.
For example, if an institution has a 100,000-share order, it can put 35,000 shares on CBX and divide the remaining shares among INET, ArcaExchange and SuperMontage, says Plunkett. "You're in four spots at a clip," he says. "If the order starts to trade on INET [but nothing has happened on CBX], the smart router will take another piece from CBX and put it on INET, and automatically reload [shares from CBX] as INET trades," he explains. This will continue until the entire block is traded.
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 the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio