Building Blocks: New Techniques in Size Creation

The next few years will prove integral for shaping new traditions in block trading. The idea of trading blocks is ancient but needs to adapt to new styles of trading and business strategies. Market participants are willing and market conditions are quieting, so the only ingredients still needed for a perfect block trading climate are the tools. Execution venues will need to offer solutions that accumulate liquidity both on the sales desk and electronically while still providing a safeguard for order flow.

Now that the VIX has begun its descent into more tolerable territory, the demand for blocks is on the rise, but willingness alone is not enough to revive block trading. Its rebirth continues to be challenged by liquidity hiding in the dark and dispersed across price points and time intervals. The majority of trading technology development has been focused on solving the symptoms of a dispersed marketplace and not necessarily addressing the root cause.

Unless there is a specific strategy or objective that requires an entire order to be executed at once, block trading simply does not take precedence in the way it once did. This differs considerably from a time when it was a priority to minimize the number of footprints on the tape. Now that the consolidated tape is cluttered with tons of small-sized trades, the impact of any one of those trades is somewhat dampened. Thus, the feeling is that as long as a large order is dispersed over time and space (venues) properly, the ability to get size done makes up for the uncertainty of looking for a block.

The combination of trading tools, acceptance of VWAP and trader demographics has made the algorithmic approach to execution strategy virtually irreversible. But does this mean that block trading is headed toward further marginalization? On the contrary, a confluence of events is driving a number of innovative approaches to executing in size.

The TABB Group Vision Note Building Blocks: New Techniques in Size Creation

This TABB Group Vision Note looks at the resurgence in block trading functionality as sales desks, crossing networks and exchanges look to create new models and tools that support block trading. The goal is to create a new market structure rather than simply solve for the market structure we have.