Block liquidity delivers strategic advantages in equity markets

However, the percentage of low turnover days that see less than R20 billion in trading volumes per day in South African Equities is rising, increasing from 37% in 2022 to 51% in 2023, resulting in lower natural and touch liquidity, wider spreads and higher volatility and trading costs.

With liquidity deemed the strategic foundation of trade execution, developing sophisticated tools that adeptly capture liquidity through block trading can help to minimise the price impact traders experience in a globally fragmented market.

These block trading tools leverage the latest algorithmic (algo) technology enhancements to expand the ability to actively seek liquidity across multiple markets. Emphasising this global perspective in liquidity assessments is paramount to ensure traders can navigate beyond domestic limitations to embrace a worldwide market landscape.

Supporting these cutting-edge block trading tools with the requisite market skills, experience and expertise in execution knowledge and quant analysis is the key to dealing with higher transactional volumes and complex client requirements.
 

Understanding block liquidity

Block trades, which involve transactions that are significantly larger than typical market orders, are integral to institutional trading strategies employed by global banks, brokers, institutional traders, sovereign wealth funds, hedge funds and quant trading firms.

These trades are governed by specific regulatory standards, which vary by market and are designed to uphold market integrity and transparency. Typically, there are two categories of block liquidity:

1. Large in Scale: This category allows execution away from the reference price. In the South African market, JSE block trades are regulated by average daily value (ADV) tiers, comparable to the Markets in Financial Instruments Directive (MiFID) II Large-in-Scale criteria.
2. Negotiated Price: Here, the price is negotiated within the spread of the published reference prices and reported to the market using the appropriate trade type.

Block trades are often completed privately, away from the public eye, allowing for discreet negotiations between parties that typically benefit from price improvements, and help mitigate the risk of information leakage that can occur with public order books.

The discreet nature of block trades inherently minimises any potential market impact, as executing large orders in smaller increments through public markets could lead to significant price shifts. Conversely, consolidating these into single-block trades minimises such disruptions.

In addition, the swift execution of block trades reduces the duration traders are exposed to the market, decreasing the risk associated with price volatility during the execution period.

As such, using block liquidity strategically can significantly reduce implementation shortfall through immediate execution and enhanced negotiation power.
 

Measuring liquidity

When executing trades, measuring the availability and quality of liquidity across diverse markets and at various times is strategically crucial to offering traders the most favourable execution terms.

A primary challenge in block trades is finding a counterparty willing to engage in large-volume transactions without affecting the market price. This is where optimal liquidity intersects with the need for efficient price discovery. The most effective strategy is often a hybrid approach that utilises tools to trade in the lit market while seeking conditional block liquidity.

The rising demand for block trades has also spurred innovative developments in tools designed for fragmented liquidity discovery. These advanced tools are crafted to capture liquidity effectively across multiple markets, ensuring optimal execution terms for traders.
 

Block trading solutions

Block trading functionality has become an integral part of the South African liquidity landscape because it allows participants to arrange and transact orders of significant size in equities and other equity-like instruments with minimum exposure and market impact.

Ideally, traders should leverage algo platforms that offer a low-touch execution channel to provide low latency market access to block liquidity across lit and dark markets. Opting for electronic execution trading solutions characterised by an iterative approach to execution quality enables traders to efficiently respond to changes in evolving markets.

These solutions can dynamically adjust the size of block indications to account for executions across various venues while simultaneous multi-venue access increases liquidity while minimising information leakage.
 

Ongoing innovation

As financial markets continue to evolve, the strategies and mechanisms surrounding block trades will adapt, yet their role in minimising implementation shortfall will likely remain fundamentally important.

As such, block liquidity will remain a potent tool for institutional traders, offering advantages such as improved pricing, reduced market impact, and enhanced efficiency.

To leverage a high-quality, tailored block liquidity solution and achieve your trading objectives, learn more about Investec Electronic Execution Services (EES) by visiting https://www.investec.com/en_za/investec-for-institutions/execution.html

Regulatory Disclosure

Investec Bank Limited registration number 1969/004763/06, an Authorised Financial Services Provider (11750), a Registered Credit Provider (NCRCP 9), an authorised Over the Counter Derivatives Provider and a member of the JSE. Investec is committed to the Code of Banking Practice as regulated by the National Financial Ombud Scheme. Copies of the Code and the Ombudsman's details are available on request or Investec COBP.