The quarantining of America has led to many changes, but one in particular is the effect on the financial markets. Certainly, volatility has increased, but with closure of the trading floors, especially the New York Stock Exchange, what else has changed?
Mike Gallagher, director of institutional trading and block desk at TD Ameritrade Institutional, says he was just discussing that question with his wife. “No one is on the floor at the New York Stock Exchange right now … typically there are guys down there pit trading using handhelds and making markets, but none of them have been there for over a month now. It’s a true testament to our market structure … that there hasn’t been a blip throughout all this. … We’ve seen fast markets and volatility is up, but it’s really amazing how efficient the markets have run.”
The block trading desk is a microcosm of how the business has continued to work — and markets trade — despite floors being closed and traders working from home. Gallagher has 16 traders on his desk that handle RIA business, and despite its continuing growth, he finds business still is getting done as efficiently.
Started in 2010, the desk’s business has surged with the growth of ETFs, he says. And today they’ve seen more business during this volatile period, including an increase in new advisors using their services. Indeed, the number of unique advisors who traded with the block desk doubled between the first quarters of 2019 and 2020, according to Gallagher.
His team was built to proactively encourage RIAs to use the desk to trade any sized order. The desk’s team asks at least two market makers to compete for the business. According to the firm, the desk has within minutes executed more than $2 billion in trades across 22 ETFs that hold more than 10,000 in individual securities with an average expense ratio of about 7 basis points and a total trade cost of 2.4 basis points.
Further, in another example, the company says the desk saved one RIA and its clients $2.6 million in trading costs while executing 66 million ETF shares. Gallagher adds they determine the savings by how much they save the client on the spread. “That’s a competition-created savings,” he says, adding that RIAs could go directly to a liquidity provider, but getting two or more bids such as their desk does on a regular basis improves the savings. Further, they submit the client post-trade reports and report performance by each market maker, which determines who does and doesn’t get the desk’s business going forward.
Big ETF Push
The block trading desk originally began to handle all of the firm’s internal business. As ETF volume grew, so did the desk as it began taking on that business. It went through several iterations in dealing with stock loan buy-ins, large retail orders, margin buyouts in only liquid securities and so on. But the institutional desk kept sending over RIAs that needed extra help, so in 2014 the desk was split off to just handle RIA business. They began with roughly 200 RIA clients and today have over 3,000 that use the desk throughout the year.
“I began building the desk with the vision of reaching every advisor out there, whether they needed an equity or ETF order help,” he says. “It started with me and two traders and now it a total of 17 traders.”
Originally the split of business was 95% ETFs and 5% individual equities, Gallagher says, but that’s gone to 80% ETFs and 20% stocks. The growth in individual stocks, Gallagher believes, is due to “some advisors becoming more active. They are into ETFs but also want to do their own thing to get an edge on alpha in the portfolios.”
The desk, though, is focused largely on ETFs, as Gallagher notes they have “crazy nerds digging into everything they can” to educate advisors and do pre-trade analysis. If an advisor comes to them asking the difference between two ETFs, the desk will do a “deep dive” into both products. “We’ll basically go through and say, ‘if you build this, your initial position is going to be a million shares, but over the next two years, if you build it up to 3 million shares and then you want to liquidate, here’s what it’s going to look like.’”
They review cost, liquidity, and exposure to other risks such as country-specific ETFs.
“That’s part of the education that we’re there for our advisors, where they can call and say, ‘tell me what I have here and what’s going to happen when I want to trade either of these two ETFs,’” Gallagher explains, adding that “the thing that sets us apart is we are proactively looking to save advisors money on each and every one of their trades.”
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