Yes, Washington, D.C., there is a market where large blocks of stock get traded. It's called Liquidnet.
In April, the average trade size on this "dark pool'' of institutional orders was 43,309. And its participation rate is high. Roughly 700 institutions with about $8.6 trillion worth of equities under management use the network. These mutual funds, pension funds and other asset managers execute big trades between themselves or use the venue's eight algorithms to execute transactions, even if they extend to other venues.
Compare that above-40,000 share average trade size to the norm in other ''lit'' and "dark'' markets.
In so-called 'lit' markets for stocks, Nasdaq OMX Group in late 2010 created a market that favored orders of large size, over orders that arrive fast, called PSX, for price-size exchange. CEO Robert Greifeld hailed this as "a fundamental change to market structure." But its goal, even at the outset, was an average trade size of 500.
Then there are the 'dark' markets where participants keep their names off their orders, presumably to make it easier to trade with each other in larger blocks. More efficient, in theory. But the president of the keeper of dark pool statistics, Joe Gawronski of Rosenblatt Securities, declared the block dead in March. The average trade size in dark pools had dropped 48% in the last two years. The largest such pool, where firms exchanging shares stay anonymous, is Credit Suisse's Crossfinder. Its average trade size in April? 174 shares.
The spread between Liquidnet and its closest competitor is significant. Number two amongst dark pools in average trade size is the POSIT Alert block trading pool with an average size of 32,000 shares, according to Investment Technology Group, its operator. According to Rosenblatt, the average trade size in Investment Technology Group's POSIT system, overall, was 3,500 shares in April
Pipeline Trading, which was neck and neck with Liquidnet, shut down this year, after the Securities and Exchange Commission found the great majority of orders in its dark pool at times were filled at various times by a trading operation affiliated with the firm. At the end of 2010, the average trade size in the Pipeline dark pool was 46,350, according to Rosenblatt.
At the time, Liquidnet's average trade size was 47,118. But, even then, Liquidnet's average daily volume was 21.1 million shares, to Pipeline's 7.2 million.
What's Liquidnet's secret? After all, technologically speaking, it's not that hard to set a floor on the trade size in an exchange or trading system. Let each firm simply mandate what size trade it'll participate in. That was Nasdaq PSX's theory.
What appears to set Liquidnet apart instead is not technology so much as who it allows to place buy and sell orders into its pool of 'liquidity,' in the term of art for capital markets.
The only organizations who can participate are mutual funds, pension funds and other large financial institutions who have natural interest in moving large blocks. Not high-frequency traders, statistical arbitrageurs or, for that matter, the "sell side.'' The brokers and dealers whose jobs are to create more trading and more trades.
"Our core business proposition is to match orders between like-minded long-term investors,'' said Lugene Forte, Liquidnet's Head of U.S. Equities.
On any given day, the asset managers Liquidnet serves put in buy and sell orders involving about 1.8 billion shares a day in the U.S. and 10 billion worldwide. Its ratio of buy orders to sell orders runs about 50- 50, which makes it easier to move large blocks. And, in a seeming throwback to the days of 'open outcry' markets, mutual funds and other institutions can negotiate the final terms of a transaction, if they stay ''in the dark.''
But they don't have to. Liquidnet supplies "Stealth," "Fair Market Value" and six other trading algorithms that allow its institutional customers to execute large block trades with "safe" liquidity from brokers and outside venues while waiting for "natural liquidity" to arrive at Liquidnet, from other institutions. Traders decide how aggressively they want to trade and what external venues they will or won't trade in. The algos also are designed to protect their identities, as much as possible, wherever they are working on institutions' behalf.
To help make sure their customers don't get 'gamed' or identified by potentially predatory trading firms, the company polices all order flow that goes outside its own bounds. A model for the 'fair value' of securities underlies all portions of trades that end up in other venues. Antigaming logic is written into every algo. The company keeps a five-member Algorithmic Services Group on alert throughout the trading day to watch over the execution of its algos and spot any red flags.
The oversight doesn't stop there. Seventeen relationship managers actively watch over the trades of 400 institutional customers in the U.S. for problems. Twice that number, 35, watch for technical problems. To make the "crossing" of large order work, worldwide, a lot of connections have to be monitored, as do all the processes involved in settling the trades.
A separate key advantage, Forte says, is that Liquidnet is an agency-only broker. It has no skin in the game. Other operators, such as Credit Suisse or Goldman Sachs Group, have their own trading businesses to worry about. At Liquidnet, mutual fund and pension plan managers don't have to worry about whether they are dealing with a party who might trade against them, said Forte.
The firm is also trying to bring into play the kind of services that have made public or 'lit' markets successful, as well. There is, for instance, the launch early last year of a commission management suite of products that does not just manage commissions.
Liquidnet's program lets institutions set the terms-say, how many pennies a share-go toward research. And then carries out the instructions. Finding ways to fund research when shares are being sold in 200-share sizes at razor-thin margins is a corollary problem to the speed versus size problem.
The company is, at the same time, trying to help institutions get their shot at shares in companies such as Facebook or LinkedIn before they go public, and find ways to work across both wholesale and retail markets, as it did last year with the Swiss Securities Exchange.
The company's model may keep it at the top of the dark pool rankings in average trade size. But its overall growth and health is not known.
The company prepared to offer its own shares to the public in the middle of 2008. Then, the global credit crisis hit. And it hasn't tested the waters since.
And it might not have the "big block" market to itself for that much longer.
A startup known as IEX Corporation has been raising capital and developing technology with the explicit intent of creating a "safe" market for mutual funds to trade in, in large transactions.
All launch processes are "in flight,'' one person close to the company confided. But how the company, led by former Royal Bank of Canada global head of electronic sales and trading, Bradley Katsuyama, will be an improvement over Liquidnet remains to be seen.
"That is the million-dollar question,'' he said.