This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
Trading volume is looked at often, but do you consider the effect of block trades?
Traders love volatility
It is well known that traders love volume. We do. Traders are some of the few market participants who are able to react quickly enough to a surprise market move, and profit from it. They can hit the sell or buy key before the reporter has finished stating the market rattling sentence. Participants, who have a job that involves more calculated fundamental analysis, will be trying to analyze the new information and come up with a plan. Traders are not making a decision about where a stock will close at the end of the quarter or even the end of the day. They are reacting to surprising news by making money off of a surprised market. If strong negative news comes out on a stock, a trader might go short, and then long once it feels oversold. Direction is irrelevant. A market can take some time to react to a new piece of information and to come to a consensus on what it means. The process of market participants coming to a consensus is what creates the volatility. Volatility on its own though, does not make a great trading environment. It’s like staring at a 14-ounce piece of raw rib eye on the counter. So much potential, but that meat needs to be placed in the correct environment to bring about the desired result. (In my case, that would be a smoking hot 600 degree grill until the outside is charred and the inside still juicy and red.)
The same is true for volatility. A trader needs volume, like the rib eye needs some heat. The better the volume, the better the trading environment. The reported volume is only one indication of the trading volume situation. Regular reported volume usually automatically includes block trades.
A block trade is when an institution trades a large volume of shares all at once, either with themselves (a cross) or with another institution. A block trade is a pre-arranged trade. The price, timing and participants are all set before the trade happens. To be considered a block trade, it must have at least 10,000 shares involved. As a trader, it is important to separate block trading volume from normal volume traded on a stock. If a particular stock trades 1 millions shares in a day, but 600,000 of the shares traded are from one block trade, it can be a key piece of information. Regular trading volume is what creates the access and execution potential for a trader, not the block trades. Traders need to be able to participate in a stock move and to do that, they need to be able to get in and out of trade. They need real trading volume. Knowing the difference between real volume and block volume will help you on your quest for a profitable trade.