We're getting into hot water about market liquidity!
I've got to dump 5 million shares of blue horns steel at 40
problem is trades by appointment.
Maffee needs to sell $200 million of this Bluehorns steel stock.
He can't execute the order because there isn't enough liquidity in the market.
No broker will take all 5 million and guarantee my price.
There's been a hot debate in the comments on how to solve this!
We need a final answer!
I'm getting help from a leading experts in algo trading.
If you wonder why we're talking about algorithms to solve a liquidity
problem - watch til the end!
But first, what is the problem?
You can see on Bloomberg, the Bid Offer spread is 2 cents.
But that only works for small amounts.
Liquidity, represented here by the order book- looks like this chart.
The bid-offer is only valid for a specific size.
For larger trades, the spread will widen.
And it's moving!
all the time!
Maffee wants to sell 5 million shares above 40.
He can’t simply sell it in the market.
He can’t ask a broker.
Nobody will guarantee the price.
Taylor offers a solution
What if you create zero-cost collar?
For more details about the strategy, there’s a video about it.
Right. Use options to protect the sale.
Buy $40 puts.
Then sell $45 calls to offset the purchase.
I said that according to Bloomberg the option can't be executed
The volumes are too thin. The liquidity problem can't be solved with options.
Celestial Outcomes said I’m reading Bloomberg wrong, it
could be set up differently.
Maybe - but we have to give some credit to Maffee.
If that was the case, then he wouldn’t have a liquidity issue in the first place.
The second point is that they could trade with “primes” directly.
It’s called over the counter or OTC.
But the issue is the same as for the spot trade.
Who will price for that huge amount in options?
And placing the orders OTC also means I’m telling the market what
my position is - they will talk!
Then I got hit by Rob Kimball's comment!
We could try to conceal the trade over time.
It's a subtle strategy: Using the collar for a portion of the amount while selling
as much as possible in the spot market.
And conceal the option trade over different expiries.
But this is a risky business.
What he means by 14 times ADV can be spotted here: The average number
of shares traded daily is 350k.
What about the initial solution from Maffee?
BILLIONS: So I've got five brokers selling a million each
and they don't know about it.
Can we pass on the problem to someone else?
Get five people to do it at precisely the same time?
BILLIONS: Are you sure about the way you're unloading that?
The issue is that brokers will check prices before dealing that size.
It's kind of shady and not very efficient.
It's likely they will figure it out.
If they know there’s more, they will move their bid.
And worse, they will quickly get there is a huge amount to be sold.
The whole market will know.
It’s a visibility issue!
None of this works!
To find the solution, I interviewed a top expert in the field,and a pioneer
in electronic trading: Joe Wald.
He's built and sold companies dealing with that.
And he's got a precise solution!
Here is how he explained the problem:
Joe Wald: The marketplace today is highly fragmented and trades in.
Very small size.
So average trade size on an exchange is probably a hundred shares or less.
And the average order size of an institution is, 10,000 shares
George (2): He talks about large institutions but the problem is exactly
the same as the one facing Axe Capital.
And this is how to solve it:
Joe Wald: Electronic trading and algorithm trading is really the methodology in
which institutional clients leverage their access to executing a trade.
When you've got a fragmented market where you've got multiple places where you can
execute and you also have high-frequency trading trying to, get an edge based on
what they're seeing in the marketplace.
It becomes an incredible challenge for an institutional client to be
able to execute their orders without signaling or creating a lot of market
impact or creating information leakage.
an institutional client that's looking to trade electronically to execute a
large block it is leveraging a strategy.
Depending on what they're looking to do potentially a liquidity sourcing
strategy, that's going to, work the order based on a quantitative kind
of, arrival price kind of strategy.
It's also gonna look to see if there's any large blocks of liquidity that take
place in some of the dark pools or some of the venues that Are at midpoint.
George (2): Two important concepts here:
First.
Fragmentation means that you need to look for liquidity in many places.
You can't do that manually, it needs to be electronic and algorithmic.
the second.
Dark pools: are venues where large investors can trade without being visible,
unlike what is happening on exchange.
So what would happen if Axe Capital was a client of Joe’s and was
passing the order to his team?
Joe Wald: Now we've got this order.
We understand the client's objectives.
They've chosen a strategy of ours that they're going to use and, it's our job
to make sure that the strategy performs optimally and that, we're picking
the right venues and the right order types and watching what's happening
in the marketplace really closely to make sure that we're executing as
best we can and ultimately delivering a great outcome for the client.
So there you go Maffee, problem solved!
Are you happy now or are you scared you're going to be replaced?
Just like in Tommyknockers. First, it makes things better for you then it destroys you.
That's how computers take over the world.