Equity Trading Volumes Decline While Overnight Block Trades Rise

Online, June 10, 2013 (Newswire.com) - The conundrum for many professionals and some of the retail side is the declining volumes and lower liquidity that exchanges and other venues are experiencing for the stock market. Where is all the liquidity going? Why are exchanges finding it harder to prosper and expand? Are there actually fewer market participants in the stock market?

What has happened is a fracturing of the stock market due to many changes and new methods, platforms, and venues. It is not that stocks are not being traded, it is that market participants are finding new ways to buy and sell stocks.

The exchanges continue to complain about declining trading volumes across the board with most reporting a decline so far in 2013 of 5-7%; that is ahead of the summer where volumes tend to decline normally around 2-4%. Their business livelihood is at risk and so is their oligopoly that has existed for many decades. The 3 big exchanges are working together to try and force competitors out of business so they can continue to control the vast wealth of investments in this country.

Declining volumes concern many professionals and the exchanges that rely upon volumes for profitability. Since some of the largest exchanges are now publicly traded companies, worrying about increasing profits is now a key element in how they conduct their business.

Meanwhile investment banks are seeing a huge rise in Overnight Block Trades. These are very large transactions between an investment bank and a company that wishes to sell shares of its stock in one large block instead of doing the traditional secondary offering or private equity transaction.

Large block trading is expected to reach record levels this year.

But with more investment banks being asked for overnight large block transactions, this leads to many questions:

Why would a company go to an investment bank after the market closes and ask for a large block transaction, rather than using the standard venues of secondary offerings, etc.?
Why do banks agree to do these transactions when they risk lower profits on the transaction?
How does this affect the stock value once this information is made public?
Is this a new form of Dark Pool activity?

There are many reasons why corporations are going directly to investment banks for sale of their stock. First and foremost is the speed at which capital can be acquired. An overnight large block order gives the company cash immediately rather than months down the road. In addition, there are no open market price fluctuations so the price structure is guaranteed.

This is a huge increase in liquidity for investment banks in a market that has seen volume steadily declining, especially on the exchanges. Block trading can be done at any time and is not always done at night.

Clearly the demand for more capital is occurring for more companies, both publicly traded firms and Private Equity. This is merely an expression of the expanding economy of the US that is not seen in GDP numbers due to how the GDP is calculated. Demand is creating the rise in large block after-hours transactions with banks. Banks, meanwhile, have the capital on hand to do the transaction but must know precisely whether they can turn the stock quickly.

Investment banks are not going to hold onto a large block for very long and may move these shares the same night, selling to a mutual fund or other large lot investor. When this occurs, you will often see a sudden rise in the outstanding shares held by institutions. When this number rises above 100%, then it is very likely a large block transaction occurred.

Then too, secondary offerings are often seen by the institutional buy side investors as a huge negative for the company or weak management. By eliminating that stigma via the overnight large block order, the company can get the much needed capital without damaging or weakening their stock value.

Banks are doing the large blocks because there is so much competition. To not do these transactions would mean letting competitive banks get the orders. It also gives the banks far more liquidity in an often liquidity strapped market environment.

In addition, more and more institutions are inquiring into investment banks, asking if there are any large block sales coming up. For the institutions these are called "bought transactions" and they are becoming far more popular with the giant and large funds that are searching for sufficient liquidity to buy large share lots in an environment where HFTs won't be driving price skyward.

From November of 2012 to April 2013, a total of 77 large block sales totaling 33.5 billion dollars were transacted between corporations and investment banks. This is a record number of transactions for a 6-month period according to Reuters, who released the report.

At least 30 percent of all secondary offerings are now being transacted via the overnight large block order processing system.

With more and more companies wanting to avoid the risks of market whims or outside event interference, overnight large block orders are expected to continue to rise.

Some market analysts, however, warn that this could be a riskier pattern for investment banks if they don't do due diligence and get stuck holding a large block of shares of a company with a declining stock value. It requires that banks really understand the company financials and growth opportunities as well as having buyers ready to purchase chunks of the large block from the banks.

Invest with Knowledge,

Martha Stokes, CMT
Member of the Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses

Visit http://technitrader.com to learn more from Martha Stokes, CMT.

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