Jeffrey O’Connor is a senior execution consultant and market intelligence analyst for US equities at Liquidnet
The recent increase in retail trade is important for the vitality of the capital markets and the price
training process. However, the market structure that underpins the elements of equity trading does
they have also come under heavy criticism from these new entrants.
This growing attention has given rise to theories about parts of financial markets that play a critical role in their efficient operation, but may be poorly understood.
Every day, trillions of dollars in stocks change hands in global capital markets. These trades
they come in different shapes and sizes: retail investors can buy or sell a few hundred or thousands of dollars of a given stock, while institutional investors can sometimes buy millions or even hundreds of millions of dollars worth of stock at once , usually defined as blocks (10,000 shares or more).
Trading large blocks in the same markets that serve retail investors is difficult because of averaging
size of transactions on the exchanges. To do so would require institutions to be able to split the order into hundreds of parts and risk creating a sharp move in the share price due to information leakage.
To avoid a significant impact on the market, for decades, institutions have used anonymous pools of liquidity
where they can buy and sell large blocks of stock without causing an impact on the market. A recent investigation by the Securities and Exchange Commission into the leaking of information between brokers and hedge funds focused not on the execution of institutional dark funds, but on the formation of large blocks using trading tables of “high contact”.
TO READ A new trade rule to avoid another 2008 crisis is almost here
As for dark pool transactions, the structure is one of anonymity and non-communication
between the broker and the counterparties involved. However, the focus on the issue has generated chatter
online forums on the state of the stock market structure and blog equity questions
Institutions have a fiduciary duty to execute their clients’ trades at the best possible price. this
it forces them to choose the best possible site for their blog while preventing information leakage
which could give other participants an unfair commercial advantage to their detriment. For institutions, this
it means understanding that just because something runs in the dark it doesn’t necessarily
means it is the best place chosen. This is where the picture gets more complex.
Advance the reform
The SEC’s current investigation into block trading could be at the center of future reforms. Is
It is important to note that this research does not address the principle of block trading, but a particular one
business model that resulted in the transfer of information that violated market rules. It seems likely
that any new transparency rules will focus on communication between parties involved in large-scale trade
blocks to ensure that privileged information of a particular order is not leaked.
In the absence of stricter regulations, it is the responsibility of brokers and investors to maintain the
integrity of block trading as a vital function in capital markets. Brokers who engage in block trading must do this
Be sure to review your processes to protect sensitive market data at all costs as well
ensuring strict controls of its customers’ communications.
Investors may use brokers for many reasons, from research access to execution, but when
comes to blocking operations, it makes sense to include a site or sites that have a conflict-free model
Make sure you use the most appropriate one(s) in your search for block liquidity for a given
There are fundamental and deep-rooted misunderstandings surrounding block trading and dark pools
must be addressed Dark pools are a vital mechanism to support the functioning of the modern
markets: protecting the integrity of the price formation process in lit markets, while helping
institutions perform very large offices.
These models have coexisted for many years. With greater participation in the financial markets by a larger group of investors, there is a need to understand them better.