Building Blocks: In The Dark, On The Phone


Tom Kingsley of Bloomberg Tradebook examines the rationale for block crossing in Asia.
With many Asian markets trading lower volumes than years past and dark trading yet to assume a larger share of executions, block trades are a stubborn fixture of Asian order books.
When you ask the buy-side what they want, the answer is always liquidity, liquidity, liquidity. The challenge of the last few years in Asia has been generally lower volumes across the exchanges. There has however been growth in volume in Hong Kong, particularly with the Stock Connect and China has seen growth in volumes and volatility. Even India’s volumes grew.
However, across the board, volumes are down, including in dark pools. Fragmentation is quite limited except for Australia and Japan, so lower volumes mean wider spreads. Wider spreads mean higher costs. Crossing the spread creates opportunity costs such as how quickly a trader needs to complete a trade and what they are willing to pay for that speed.
Where are the Asian pools?
The ultimate Asian dark pool, if there was such a thing, would be a block cross, where orders are never sent to a dark pool and all trades execute electronically at the exchange. In the last 20 years it has always been difficult to find trusted partners to cross with. Now, it is even more challenging because of the risk of information leakage, which is very expensive in a market with thinner volumes.
While block crossing is not a new concept, it has become more important in Asia. Agency brokers maintain strong buy-side anonymity, which is why last year we began testing a combination of electronic trading platforms with traditional block crossing.
The end result is a system that pairs two sides of a trade in the traditional sense of upstairs block crossing, but the counterparties send the trade electronically to create the audit trail. The commitment to anonymity means if two buy-side firms are combined in a cross trade, no one knows who they are. It is anonymous and then the trade is printed on the tape using a local broker we designate.
Remembering how to speak
We are likely to move to more traditional block crossing because the dark executions as a percentage of Asian trades are down. Unlike the US or Europe where multiple venues created fragmentation, and yet homogeneity. Without greater fragmentation and dark pool proliferation or higher volumes, traders are forced to search for blocks.
The problem is, we have a new generation of traders that handle far fewer voice orders. Asking an electronic trader trained around algorithms and DMA to use the phone to execute a voice broker cross is quite different.
Many traders on the buy-side and sell-side do not have much experience trading blocks. Educating traders more comfortable using algorithms about making prudent decisions in a block opportunity is crucial.
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