Harris on block trading

September 25, 2006

Why do we tend to see larger deal sizes on dealer to client ECNs like TradeWeb than we do on interdealer ECNs like MTS ?  As usual Harris is illuminating in chapter 15, on block traders.

When a dealer is approached by a trader demanding liquidity in large size, he will suspect that trader of being better informed. After all, if you’re a well informed trader about to place a winning trade, wouldn’t you size up the deal to maximise winnings ? The dealer will worry that if he takes the trade, prices will move against him, and he’ll lose money on a position he can’t unwind. He’ll also worry that the block may have been split up, and there may be more large trades to follow. So any dealer taking a large trade must be sure that his counterparty is less well informed. This isn’t a problem on quote driven markets, where we know the counterparty identity when handling an RFQ. But that can’t be the case on a market organised as an anonymous order driven exchange…

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