How coronavirus volatility piqued interest in TD Ameritrade’s block desk
Financial advisor Angela Bender talks about pennies in her second meeting with prospective clients — specifically, how her firm saves them.
If her RIA, AMJ Financial, can clip about four cents off each trade, a client can retire a year early (that’s given a $1 million portfolio seeking a moderate 6% return rate).
How can a relatively small firm make such a powerful statement? AMJ Financial manages $184 million in client assets, but it makes frequent use of its custodian’s block desk. By doing so, Bender has access to TD Ameritrade Institutional’s bench of 16 traders, who are bringing their institutional trading and market-making backgrounds to her clients.
“That’s really powerful to be able to express to your client,” Bender says. “Having a year more of income is nothing to shake your head at.”
With the market laboring under unparalleled trading volatility and just finishing its worst quarter since the 2008-09 financial crisis, block desks may be more useful to RIAs than ever before. Are advisors taking advantage of them?
Some. About 3,000 of TD Ameritrade’s more than 7,000 RIAs use its block desk. In 2019, the custodian estimates it helped RIAs execute trades of roughly 2 billion shares in 2019, generating $45 million in savings for their clients. Mike Gallagher, who started the desk in 2010, says his traders have been busier than ever in recent weeks given the current markets.
But the majority of RIAs at TD don’t use this resource. Granted, some exclusively use mutual funds in client portfolios and don’t need the service. But other advisors — whose clients could benefit — may not know of the desk — or realize the potential for a better execution price. Traders are working to bridge those gaps.
“Trading is complicated. It’s getting more complicated all the time,” says Tom Generazio. He joined TD Ameritrade’s institutional block desk in 2016 and says the firm has since been reaching out to advisors that could benefit from their service, speaking at conferences and hosting webinars to help them better understand the nuances of trading.
The benefits can be substantial for clients, advisors and traders say. RIAs seeking to trade thousands of shares or a meaningful percentage of a thinly traded ETFs’ average daily volume, may cause prices to swing. That means some clients get a better execution price than others.
Tammy Barnes, who runs trading at the dually registered firm McDaniel Knutson Financial Partners, says her firm has been adding ETFs by Innovator Capital Management called Innovator funds to provide a buffer from market volatility. Some funds have an average daily volume of as little as 5,000, she says.
“I put in orders for 2 million shares,” she says. In some cases, the shares have to be created for the firm. TD’s block desk helped her execute the trade without moving the market.
Other ways advisors may be utilizing the desk: to get a better understanding of the underlying components of an ETF or of the liquidity of an investment before a purchase.
In late March, Bender looked into investing several million in short-duration bonds to guarantee protection of client yields. After getting a risk quote from the block desk, she determined the bid-ask spreads were too wide and decided to place the cash in a high-yield savings account instead.
Whatever the request, block desks are seeing a surge in activity over the last two months, and trading is up.
In March, the number of block trades with orders of over 25,000 shares increased by 100% year-over-year, according to data compiled by Flyer, which has a multi-asset portfolio trading platform for active wealth managers. There was a 60% year-over-year increase in total trades during this time.
“People are seeing huge intraday price swings,” says Kevin Fischer, who runs the block desk at the custodian Interactive Brokers. “The profit and loss opportunities are much greater.”
Spreads reflect liquidity, but also can reflect perceived risk a market maker is taking on by offering a trade, including risk that the price could rapidly change. In the wake of the coronavirus pandemic, Fischer has seen markets that used to be 20 or 30 cents wide now between $1 or $2.
“All of a sudden [advisors] may find themselves needing to source liquidity for the first time,” he says, noting that RIAs who never used the block desk have been calling up his four-person team, which specializes in stock, option, future, fixed income and corporate bond trading.
The wider spreads cause uneasiness for portfolio managers and traders alike, according to TD Ameritrade’s Gallagher. “Everything's moving faster,” he says. “Uncertainty rises.”
Patrick Haley, an advisor who joined Ritholtz Wealth Management from Merrill Lynch in 2014, says he typically calls TD’s block desk at least once a month. Now, he’s speaking to its traders every other day — if not every day.
In some cases, Haley needs to use the block desks at both of Ritholtz Wealth’s custodians at once. “Sometimes I’ll have Schwab on the office line, and TD on the cell phone,” he says.
Schwab has been building out its desk, too, in recent years. With 31 traders on its block desk for RIAs, a company spokeswoman says Schwab has been investing in adding more capabilities, including access to algorithms (a set of instructions to carry out an automated trade), connectivity through all Financial Information Exchange networks and access to on-demand competitive auction markets for large ETF and option trades via its Request for Quote functionality.
In response to a question of whether Schwab would incorporate TD’s desk into its own following its expected acquisition of TD, the spokeswoman says: “We don’t have any decisions to announce at this time.”
In addition to Interactive Brokers’ block desk of four traders, the custodian and brokerage firm has built out trading technology for its advisors to use on their own. The firm has over 100 algos and order types for RIAs to limit risk, speed execution and provide price improvement, among other goals. The company also has a smart router that automatically scans for the best available prices.
Some advisors are chipping off substantial costs for clients by using a block desk. “I can’t even begin to unpack how much we save our clients,” Barnes says.
Brice Carter, CIO at Financial Strategies Group in Okemos, Michigan, says the block desk at TD Ameritrade has lowered the costs of trades by up to $10,000.
On April 13, Generazio says, TD’s block desk cut an RIA’s cost of executing a portfolio trade with a $1 billion notional value by thousands of dollars.
“When you're trading that type of size ... every single basis point matters,” Generazio says, noting that one bip on a trade of that size is $100,000.
Bender’s RIA works hard to convey the complicated nature of execution, and what it means to a client’s portfolio.
“I don’t want people to feel like we’re the people behind the curtain,” she says. “I also don’t want to make it so complex they feel inhibited in some way from having a conversation about it.”
Bender’s firm pulls the execution costs out of annual reports and incorporates them into the financial plans, walking clients through the numbers and their long-term impact. She points out when block trading was utilized on transactions, and how much money it saved.
“[Advisors] don’t pay as much attention to the price discovery as we should and that’s definitely eating some of the return,” she says. “The value proposition that advisors really bring to clients is to help them make the right decisions, but also to help them implement them.”
For Barnes, the block desk at TD simply feels like an extension of her own firm.
“For Christmas every year I send them barbecue or brownies, or other silly things — just so say hey, thank you for caring about us,” she says.