Cracking the block market is a tall order and has been for the past decade, TABB Group says in new research.
Although buy-side firms trading equities have continued to value block trading, there’s been a significant gap between what could trade as a block, the amount the buy side wants to trade in blocks and the actual block numbers – a gap that has persisted despite a number of efforts to “crack the code”, each with inherent limits.
To facilitate block trading successfully, says Sayena Mostowfi, senior analyst at TABB who wrote the new report, “Equity Market Structure: Stumbling Blocks,” the industry needs to resolve multiple requirements often at odds with one another, including: enabling trusted counterparties and allowing for anonymity; sourcing liquidity and paying for services; quick-matching engines and seamless workflow integration; and marrying electronic messaging with traditional sales trading.
Although Mostowfi points out in TabbFORUM commentary, Building Blocks for a Post-Reg NMS World, that there is no technological panacea to make trading more trustworthy, there are mechanisms offering better protection to the buy side that will increase the number of interactions they would have with their trusted counterparties.
While early successes have been shown to have a ceiling in the amount of block liquidity that can be brought under the roof of an independent venue, it’s difficult to imagine what buy-side traders would have done without them.
Mostowfi says: “New innovative solutions, not targeted regulation, are needed to address the business model tensions and market complexities.”
TABB Group believes that with twists on existing solutions, the share volume of institutional blocks would increase by around 476 million share per day, up from about 284 million per day today.
The 15-page report with 16 exhibits focuses on block market sizing; average parent order size; percentage of block executions representing parent order size; biggest buy side concerns in trading blocks; number of average brokers used to trade blocks; and top reasons to trade and not to trade with brokers.