Fund managers skip the block window

Open Up Front Running Options

The number of trades taking place through the 'block deal' windows of stock exchanges is on the decline, even though the quantum of big-ticket transactions is on the rise. Market watchers say when it comes to inter-institutional block trades in midcap stocks, many fund managers prefer to route the trades through the regular window on the trading terminals, even though there is a risk that the buyer may not get the entire chunk of shares that he has bid for.
One reason is that the buyer may want to keep his identity a secret. This is not possible, if the trade has been done through the block deal window, as the identity of both the buyer and seller has to be disclosed. Another reason is the duration and pricing restrictions. The block trade window is open only for the first half an hour of the session, and cannot be priced more than plus/minus 1% of the previous day's closing price (if the deals are struck right at the start of the session) or plus/minus 1% of the prevailing market price once trading commences.

But one more reason, allege market watchers, is that bypassing the block deal window facilitates front running — an illegal activity in which a trader takes a position in an equity, based on advance information of an impending trade.
In 2007, there were on an average 52 block deals every month. This dropped to 33 in 2008, and for the first six months of 2009, it has further dropped to 21.5. "Front running usually happens when large deals are struck at a significant discount to the prevailing market price," says a dealer, who is familiar with the dubious dealings on Dalal Street.
The reason being, the stock price usually bounces back after the deal has been executed. So, if an operator has picked up a position based on that information, it can be offloaded for a quick profit the same day itself, or at a later date. "Sometimes, it can be the dealer at the broking house who leaks out the information before the deal is struck, and, at other times, it is the fund manager who leaks the details to some friendly operator," he says. WINDOW OF OPPORTUNITY

BLOCKED OFF
Trade through the regular window helps a buyer remain anonymous Block window has duration and pricing restrictions. It's open only for the first half an hour of the session. The deal has to be struck within a specified price band Regular trade window allows a trader to engage in front running

TIP-OFF TRADE
Front running is when a trader takes a position in an equity, based on advance information of an impending trade
It usually happens when large deals are struck at a significant discount to the prevailing market price
These deals typically happen in mid-cap stocks, and within minutes of opening Small trade size prevents detection of shady deals THE Modus Operandi Large deals, which are reported under bulk deal
disclosure requirements, are negotiated trades. The broking houses, executing the buy and sell orders, negotiate the price on the phone. In a bid to ensure that their orders are exactly matched, dealers follow what is commonly known as the 1-2-3 method, whereby both sides count 3 over the phone, before punching the 'enter' button on their trading terminals.

Suppose fund A wants to sell 10-lakh shares of a company and fund B agrees to buy it. It can so happen that the fund manager, who is purchasing the stock, may tip off a market operator, and ask him to bid for a small chunk alongside him, but at a price marginally better than that of the fund house. So, if the fund house has placed a bid for 10 lakh shares at Rs 100 per share, the operator will bid for 1 lakh shares at Rs 100.05. The prevailing market price may be Rs 110. Once the order is punched in, the system will match the seller's offer with the best quoted bids, which include the 1-lakh shares at Rs 100.05 placed by the operator. The result will be that the fund house will get only 9 lakh shares against the 10 lakh shares it has bid for (it will also pay only for 9 lakh shares, but there is clearly an opportunity loss, if the stock price rises).

Details of deals involving more than 0.5% of a company's equity have to be disclosed by the respective broking houses, if a single client (either on the buy or sell side) exceeds this limit. But the operator will never figure on the radar, since his deal size is too small compared to the overall size of the deal.
Market watchers say these deals typically happen in mid-cap stocks, and that too minutes after trading starts. "If there are too many orders in the system, this operation becomes difficult, as many shares will go to those buyers who are offering better bids," says the dealer.