Many participants are of the belief that the difficulty in crossing blocks is because “long-only investors typically buy stocks at the same time, and vice versa.” The question of whether “same-side” institutions inhibit block trading is not new and a question frequently asked by many of our clients. Same-Side Percentage is a proprietary metric created by Luminex designed to help us discern how often subscribers are on the same side of the market. We review the Same Side Percentage metric and our findings that support the willingness and an ability to trade blocks.
Same Side Percentage
Metric Definition: The percentage of occurrences where multiple orders in the same symbol, sent to Luminex on a given day, are on the same side of the market.
Given the characteristics of our subscribers, the Same Size Percentage metric was one of the first measures we designed to verify whether the “same-side” argument held true. On a daily basis, we found that roughly 50% of the time, two or more users who entered an order, in the same symbol, were on the same side (see below).
Small trade sizes are one consequence of a fragmented market and an architecture that evolved into one that is better suited for small orders. Algorithms and smart-order-routers (SORs) are highly sophisticated, and despite their adaptation to a trading ecosystem where small orders are the norm, they often send small orders out of need. Sending a block-sized order to a venue that primarily receives small orders dramatically increases the risk of information leakage. And yet, if sending small orders is necessary for maintaining anonymity, the likelihood of finding block-sized liquidity decreases.
Sometimes, traders do wind up on the same side of the market, yet the generalization suggests that it occurs a lot more frequently than 50%. The statement also implies that the “same-side” investor phenomenon is not new. The fact is, several factors are responsible for why traders find sourcing block liquidity particularly challenging. For example, the rate of odd lot trading has increased dramatically over the past couple of years. According to the S.E.C. Midas system, on March 16, 2016, odd lot trades on-exchange reached a new high and accounted for 33.36% of all trades.
Odd lots have always been part of the normal functioning of markets, but became a lot more noticeable following a regulatory change in December 2013 that required the reporting of odd lots to the consolidated tape. Since then, academics have published quite a few studies on odd lots and that certain trading strategies derive a significant amount of information from the use of odd lots orders. (It is important to note that stock prices are higher today compared to prior years, inarguably a reasonable factor that influences the rate of odd lots.)
Even though odd lots count toward total volume by technical standards, institutions typically do not find them optimal to their trading process. Furthermore, when considering odd lot volume that occurs off-exchange, the profile of what constitutes true liquidity becomes that much more difficult to discern. Non-ATS volume can be difficult to identify, and certain volume, like retail / wholesale volume, although reported to the tape, is considered practically, if not entirely, inaccessible to an institution. Inaccessible volume ultimately creates a dilemma around the perception of “volume”, and often causes participants to continue trading to keep up with tape volume. In other words, they face the “volume versus liquidity” conundrum. Therefore, even though institutions will find themselves on the same side of the market at times, the inability to trade blocks is more often due to the challenges associated with trying to find meaningful volume in an overly fragmented and complex marketplace.
The Average Top Quantity Metric
Each week, we provide our subscribers with metrics on our traded volume and include the Average Top Quantity metric. We believe Average Top Quantity is a metric that strongly reinforces our clients’ willingness to trade blocks. Average Top Quantity is the average of the Top Quantity (maximum order size in shares) for all orders submitted to Luminex for a designated period.
BUY 100,000 shares of XYZ @ 10.00, with an Auto-Ex Quantity equal to 5,000
Top Quantity = 100,000 shares
Why do we measure Average Top Quantity?
In some ways, Average Top Quantity relates to average trade size; however, it provides information around the order prior to executing. Although execution size is important, the difference from the order’s original size is equally relevant. Year to-date, the weekly average order size sent to Luminex has increased from 119,000 shares to 145,700 shares, nearly 22% (see below). When presented with an opportunity to trade, or “size-up”, 75% of orders submitted were equal to the maximum share amount. Over time, when new venues grow their user base, they typically experience a decline in order size and execution size. We have experienced a different result. Our subscriber base has grown, and the size of the orders we are receiving, on average, continues to increase.
Venue specific metrics are important to the overall trading process because they provide useful insight into participant behavior and the primary forces behind volume. We realize that market conditions fluctuate and trading a block may not always be the optimal trading solution. However, we are fortunate to have a unique viewpoint due to the nature of our subscribers and market model and remain confident that the willingness and ability to trade blocks is alive and well. If you have any questions regarding any of our metrics, or others that might be of particular interest, please let us know.