As liquidity in the Australian share market continues to drop and algorithmic trading has splintered institutional activity into tiny parcels, the challenge for big super funds to get in and out of domestic stocks is getting worse. Institutional flows into Australia have plummeted.
Against this backdrop, a group of former traders has launched a new block-trading venue, Block Event, which blends human intervention in trading, through old-fashioned broking skills, and the technological trends.
Co-founders David Klinger, the chief executive, and Phillip Weinberg, the chief operating officer, went live with Block Event earlier this year after spending two years in the company’s development, testing the model with clients through various iterations. They have recruited Anthony ‘Jav’ Brown from Deutsche Bank in June to head up sales and, with similarly experienced traders Paul Horneman and Richard Macfarlane, who is based in Asia, are now planning to expand regionally.
One of the main reasons the largest super funds have been increasingly insourcing their investments in recent years, usually starting with Australian equities, has been because of capacity constraints. Some commentators have predicted that it will soon be impossible for a big super fund to invest in Australian small caps, for instance.
Putting aside the issue of their size, the problem for super funds has been exacerbated because of the trend to algorithmic or high frequency trading (both of which require trading parcels to be split down to tiny sizes) and, more recently, the drop in liquidity because Australia and some other parts of the region have fallen out of favor with foreign investors. Institutional flows into Australia are estimated to have dropped from 15-or-so per cent to as low as 5 per cent in the past four years.
In a presentation in Sydney last week, Klinger and Brown said the big issue to be solved was the transaction costs associated with investors moving the market. The best way to do this was to find an investor who was willing to trade the whole line at the mid-point of the market.
Human beings, it seems at last, can help computers in such an endeavor. Block Event is a venue where the investors can be transparent about their aims without fear of being ‘front-run’ by high frequency and other algorithmic traders.
The company offers investors three ways to trade: fully automated, as with other venues; ‘intermediated’, whereby Block Event will make a few phone calls on the investor’s behalf based on activity it’s seen; and an advertisement service for clients to approach the professional market.
Another key point of differentiation with other venues, Klinger, who established the Asian block-trading presence for Liquidnet, believes that Block Event says that all “indications of interest” (IOIs) from brokers, say, are backed up by real orders.
Apparently, these messages to the market are sometimes suspect at some other venues, being used as ‘fishing expeditions’ rather than real intentions.
In terms of its business model, Block Event is looking to expand both geographically and in terms of its asset class offering and product range. It has opened its Hong Kong office and is looking to be able to trade there as well as Japan, the Philippines and Indonesia within the next few months.
Klinger says that the firm is also looking to satisfy the neglected market of ultra-high-net-worth investors and family offices, which are starting to also suffer from the same problems of transactions costs facing big super funds.
* Greg Bright is publisher of Investor Strategy News (Australia)