Charting a Return to Block Trading – The Trade News

Greater liquidity fragmentation and the rise of algo trading have fuelled a greater need for specialised block trading solutions, according to Christopher Gregory, co-founder and CEO of sell-side block trading system Squawker.

Squawker will have a staggered launch throughout April and according to Gregory, the growing difficulty to execute in size fuelled its development, as market participants continue to carve up large orders to interact on exchanges and multilateral trading facilities (MTFs).

“Squawker was born out of the fact that machine driven trading of all varieties – high frequency trading, algo or quant trading – is diverging from human driven trading and it’s no longer safe for a human to interact manually on electronic order books,” Gregory said.

The market infrastructure veteran cites the sustained drop in average trade size on the London Stock Exchange in recent years, which continues to decrease around 3% each month, as evidence that order books have become very mature and offer only shallow, fast-moving liquidity. 

While buy-side firms have a number of options for executing block trades, including venues such as Liquidnet and broker dark pools, sell-side firms have no independent mechanism to trade blocks against each other, asserts Gregory.

“Sell-side participants will be invited to join Squawker because unlike the buy-side, they have no solution to trading blocks amongst each other. As sell-side firms collect order flow from their buy-side customers, liquidity is concentrated on a smaller number of firms on the sell-side than on the buy-side, improving the chance of finding a match between firms in the same pool,” Gregory said.

However, the core idea behind Squawker – which hopes to on-board 70-100 sell-side counterparts in April – is not to offer execution, but a basis for two sell-side counterparts to negotiate a block trade anonymously, which is then executed bilaterally.

The platform collects trading interest from counterparties and suggests matches for orders based on the trade information, trading history and profile of they way different firms behave in the system.

Gregory sees this structure as the converging of person-to-person trading and electronic straight-through-processing, as negotiations will generate a FIX message that can be read by order management systems, compliance infrastructure and yield trade performance data.

The venue announced it has selected BNP Paribas Securities Services as its pan-European central settlement provider, while its infrastructure will be hosted by trading technology provider BT Radianz. 

As execution does not take place on the system, Squawker will not be classed as an MTF, but will have to navigate impending changes to European regulation under MiFID II, which is expected to be implemented in 2015.

“Squawker is a discretionary system and no trades execute automatically, unlike a block match or order book, so it is not be classed as an MTF. Right now, under MiFID, Squawker is regulated as a broker and depending on final rules, may be classed as an organised trading facility under MiFID II,” he said.