Forefront Communications

Traders Magazine: Block Trading Reactions to COVID-19

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“Stop and take a breath.”

“Patience is a virtue.”

In normal times we at Luminex repeat phrases like these regularly to our clients, as we encourage them to take the time to find the right match to make a block trade. I’ve said natural block liquidity is the “Holy Grail” for traders, and the quest for it can be challenging for a trader’s patience even in “normal” times.

In our present moment, these messages may be even more relevant and worth reflecting on. After all, we have just lived through two of the busiest and most volatile months for the markets in more than a decade!

I know what you’re thinking, amid the upheaval of the past couple of months: who has time to write (or even read) a blog post? But I think right now, as I write this in the first week of May, there’s a feeling that things have settled down a bit. There’s still plenty of fear, and reason for concern, but recognizing where we’ve been fortunate and so many others have not, it feels like we can take a moment to reflect on what we’ve all gone through so far.

What follows are not sweeping philosophical pronouncements.  I just want to share what we’ve noticed in the marketplace and offer some thoughts as to why it’s happening.

The most interesting and counterintuitive thing we’ve observed is that block trading has been holding up very well.

Now, with equities we know that when volatility goes up, volume goes up. Everyone gets and expects that. But when volatility goes up, what happens to block volume can be a bit more nuanced.

Over the course of my 25-plus years on the buy side, whether it was managing equity portfolios, trading stock or managing a team of equity traders, it was my experience that when volatility increased, traders were generally reluctant to stand still long enough to trade a block of stock. But in the peak of the craziness of the pandemic trading, during the period of extreme volatility, the opposite happened.  Traders were noticeably willing to stand still longer and stand up to trade blocks.

What’s different now? Looking at the numbers more closely, there seems to be a tipping point with volatility and the willingness to trade blocks. When a VIX of 10-15 moves to a VIX of 16-20, traders tend to pull back and are less willing to trade blocks. At this level, risk is elevated, but not too elevated. Traders can take their chances spreading their orders across the day to avoid buying the high or selling the low. But behaviors change when there is a big shift in volatility. Once the VIX starts to move above 50 and even approach 80, blocks are back, and that is what we have seen in the current frenzy.

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