Block Event, an Australian startup marrying electronic and sales trading for equity blocks, is putting the human touch back into the economics of disruption.
The company commenced trading of Australian equities in 2016 and this year has begun operations in Hong Kong, with India next.
Block Event’s premise is that the electronification of equity markets has gone too far, leading to such fragmentation among trading venues and participants that it has become harder, not easier, to trade large amounts of stock at a single price, at one go.
David Klinger, CEO at Block Event, says this fragmentation has led to market practices that frustrates buy-side dealers, notably ‘fading’, in which contras on a trade back away. Not only do a minority of matches actually get executed, but the dealer’s position has been leaked to the market, putting her at a disadvantage.
Automated trading systems have emerged to generate matches, such as Liquidnet, a platform restricted to buy sides, or ITG’s Posit, a global dark trading venue. But these systems require the buyer and seller be live to fulfill the trade.
“Liquidnet is great with two contra orders, if both parties are live,” says a global head of trading based in Sydney. “But if you have a buy today but no sell until tomorrow, it’s like two ships passing in the night.”
Marrying tech with humans
Block Event is trying to muscle its way into this space by combining its technology with experienced human sales traders. The platform, which includes buy sides and brokers, but excludes high-frequency traders, brings in orders while building a data history. The team of sales traders works the phones with a select number of customers to fulfill trades that don’t instantly click.
“If there’s no trade on our system, we ask the customer if we can make a few calls and ‘wake up’ the liquidity,” Klinger said. “The computer matches the trade but you still need people to make the trade happen.” The team makes targeted calls based on their experience and personal contacts.
It’s a boutique service for long-only mutual fund companies that are finding fewer ways to trade, given the shift of assets to passive and exchange-traded funds or quant strategies.
“I’m a fan, but their success is questionable,” another buy-side head of dealing told DigFin. He has recently installed Block Event on his trading desk. But: “The anti-active fund manager trend means nobody is seeing much block flow. Dealers and fund managers are returning to trusted relationships, but the real theme is passive investments, which makes broking tough now.”
Liquidnet automates alerts
Meanwhile, Liquidnet has also addressed the issue of ‘ships passing in the night’ by introducing an electronic alert. Lee Porter, managing director for Asia Pacific in Hong Kong, says the alert will go to no more than five contras in the wake of an unfilled match. “If there’s no match on Liquidnet, you can use this to reach out to confirm anyone who has an order.”
The buy-side global head of trading said: “It’s the same format as Block Event, but instead of a phone call, I get an alert.” He likes the color that a sales trader can provide, but whether Block Event’s model is sustainable depends on it attracting more participants.
But he adds: “Initially I was skeptical but now I’m on board.”
So for block orders, it’s man versus machine, only this time, Block Event’s humans are hoping to disrupt established electronic platforms.
Klinger says the business is close to breaking even. For he and his co-founders, the long-term goal could involve selling the business to an exchange or to a big global broker. But for now, he says the focus is on “disrupting the way people approach the stock market”, and building the firm’s dataset, so that it can market transaction cost analysis or other market-related research.
Klinger previously served as head of Liquidnet’s Asia business. He also served as head of Asia-Pacific equities at Credit Suisse, where he helped introduce its electronic trading capabilities to the region. He also ran equities at Macquarie. His co-founders are also equity market veterans.
Liquidnet now has 300 buy sides from Asia Pacific on its platform, says Lee. Last year the platform traded $32 billion in Asia, including block trades.