On the way in this morning, I was listening to my favourite AC/DC album and thinking about the challenges of block trading. The problem is well known – a combination of multi-market trading, algos and DMA have created a vicious cycle that continues to shrink order sizes. This is compounded by regulators who insist that lit is better than dark and that the best way to demonstrate this is by putting arbitrary caps on dark pool trading. This has prompted a slew of announcements from venues with their take on how to solve the block problem. One of the most innovative is the Turquoise Block Discovery facility which works in tandem with its Uncross feature. The basic idea is that you send in a “well I would if I could” conditional order which only trades if it meets another firm block order or interest coming the other way. The LSE’s main market has got in on the game too, with its announcement of a midday auction which, in turn, has been met by a similar announcement from BATS Chi-X. These are all good ideas, and definite steps in the right direction, but they currently only solve for blocks that reside within the sell-side broker community. The really juicy stuff, however, is still on the blotters of the buy-side and even successful buy-side crossing networks like Liquidnet can be thwarted by phantom blotters designed purely to mask true trading intentions.
All this just serves to highlight the limitations of trying to solve this problem through technology without a more fundamental change of the business model. What’s really needed is the human intervention of the experienced sales trader who built real relationships with the buy-side dealer community based on trust. But, just as AC/DC mourned the loss of their lead singer on their iconic 1980 album, industry economics means that such traders are missed too.