The State of the Block: Optimizing Technology to Trade in Size

Although block trading increased in 2016, the adoption rate of some avenues of finding blocks — namely IOIs, actionable IOIs and capital commitment — stagnated. In fact, one-third of buy-side firms did not use IOIs, two-thirds did not use actionable IOIs and roughly one-half did not use capital commitment.

However, firms that used more capital commitment, IOIs, and actionable IOIs were the ones likely to increase their use of these products and services in 2016. Firms that used these products more have developed a greater comfort with them and have added technologies and processes to make the tools align more closely to their needs and strategies. This experience loop feeds into even more usage by these firms and builds upon the advantage they gain from using the products. These “power users” contributed to an increase in block trading in 2016, largely driven by firms that already executed a larger percentage of their volume via blocks.

Firms that have not used these products may have different reasons for avoiding them. Sometimes the products simply do not fit the firm’s trading strategies. Other firms can be turned off after a negative experience such as discovering that an IOI was a fishing expedition or having challenges integrating actionable IOIs into their existing workflow.

The difference between power users and minimal users is how they interact with these trading tools. Firms that have success with IOIs often have additional technology that assesses their quality, determines which brokers are consistently providing the higher quality IOIs, and aggregates this information in a central location for all traders on the desk. In the case of actionable IOIs, some buy-side firms may even work with their brokers to make changes to the products and further customize or tweak them based on their experience.

While this approach requires an investment of time and resources to make adjustments, the payoff is not only that firms become more familiar with the tools, but the tools become more customized to firms’ goals and objectives. Furthermore, with more technology in place, the buy side can take greater control of block trading and interact with the block technology in a more structured and proactive way.