When you get an order of that size - or larger ones, your first reaction is to look at the market. If you're a market maker, you know the issue, so you can make a judgement call right off the bat. If you trade proprietarily, it's more tricky because you aren't as familiar with the players in the issue and usually aren't with how it trades.
The judgement call is this: given the price right now, the news on the stock (if any), and market conditions, what figure can I give.
If ABCD is trading at 50-1/4, and an institution says, LPS5, can you get me 500,000 shares, I'm going to say (after some deliberation)..."OK, I'll get it at (price) or better." Commissions or ticket (depending upon whether my firm is a custodian or a DVP broker for this entity) will sometimes be quoted, sometimes not. Either way, the caller will say either, "OK," "No thanks," or usually, "You'll hear from us in five."
If they say OK, you go to work. That's a firm committment that they want me to do their order. If they say "you'll hear from us in five," in the meantime an assistant would be calling stock loan and borrow, checking the proprietary accounts, calling the arb desk, etc., seeing what they might have had going on in ABCD. You'd also have him tell the sales traders that there are 500,000 shs of ABCD pickup on deck (be ready to buy at my signal, so dig into your lead book and have some sellers lined up).
When the institution says they'll call back, they're usually checking with other traders to see if someone will give them a better commission or a lower price. Lower price wins over higher prices and higher commissions.
Now, if they either said "OK" or "We'll call you back" and they call back and say ok, you hit it. I immediately start taking as much as I can via ECN's, from sales traders, etc., keeping a close eye on the market. I'm watching for goosing, which is when people start to notice that I'm a buyer and push the stock up. If it starts running on me, I do as best as I can and if I get most of the order off and have barely nudged the price, I fill the balance from inventory and pat myself on the back.
If I can do better than I told the institution, great, I'll get more orders from them in the future. If I do worse, I probably won't hear from them soon, unless we've had a long relationship.
There's more to it than this, but perhaps this gives a decent sketch of moving a big order.
LPS5 |
