New Kids on the Block
Block-Trading Interest Escalates
Why is there increased interest in block-execution systems? Institutions prefer to cross stock with communities of buyers and sellers, rather than reveal their intentions to specialists, or interact with day traders and arbitrageurs, say several sources.
Though institutions are in a protected environment, they still want the opportunity to get a better price. With CBX - which is offered by Instinet's value-added broker as opposed to the ECN side of the business - institutions can use order types found in ECNs to conceal their order size. For the first time, ECN order types are being combined with a block-execution system, notes TowerGroup's Mizen, referring to CBX's reserve and discretion features.
The reserve feature allows traders to hide the full amount of shares they want to buy or sell. "Visibly, you'll see 1,000 shares, but it's actually 25,000 shares the person is trying to buy," explains Instinet's Plunkett. CBX also offers discretion - a trader may set a top price of 50 cents to buy, while the visible market price is 46 cents. If bids come in under 50 cents, then the trader will automatically buy, without having to show his hand.
Meanwhile, Pipeline addresses "criticisms of existing systems out there," including CBX, says Jamie Selway, managing director of Whitecap Trading, an institutional agency brokerage firm. With Pipeline, "Transactions are consummated by a computer, they're not [negotiated] by a human being," he says.
A second criticism of other block-execution systems is that they do not allow brokers into the system, which limits the liquidity that's available, adds Selway. In Pipeline's case, however, traders watch the Pipeline Block Board, where block orders are advertised. Traders are notified when a large order has entered the system - but they won't be told whether it's a buy or sell order to prevent information leakage. "Other traders could then enter their own hidden orders knowing that there is a very good chance for execution," says Fred Federspiel, president of Pipeline. If the prices match, the trades are immediately executed.
Regarding Pipeline's automatic execution, Whitecap's Selway says, "This thing transacts without any footprint. Using the system, there's not going to be any information leakage."
But do the new block-execution systems offer anything new? Andy Brooks, head of equity trading at T. Rowe Price, says, "We are always willing at least to examine innovation and new entrants as they appear." Though Brooks is not yet familiar with the new Instinet product, he notes, "It [doesn't seem] any different than the POSIT cross. "If it's a me-too product, that really doesn't excite anyone." But regarding Pipeline, Brooks says, "They have a couple of twists that are not available in some of the other networks."
If buy-side firms are already using multiple systems - sources say they have their favorite two or three - how many systems can the buy-side look at? "That's the crux of the matter," says Jay Fraser, a director of ITG Group. "People will vote with their feet, and it doesn't take long." 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
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