Tolga Dokumcu, Director of Sales Trading and Execution

Buying or selling shares for clients isn’t just a matter of setting a target price and wading into the market. Financial advisers placing sizeable orders when trading Equites, ETF’s and or Hybrids, may get better results by focusing on key principles – and taking advantage of the expertise of their chosen broker.

Below are three strategies to help achieve the best trading outcomes.

1. Break it down

Placing a large order when market liquidity is low should be a carefully considered process. Large orders are those which have a significant associated dollar value and/or represent a large percentage of the average traded daily volume for a security.

Undertaking price discovery can be important in these situations. That simply means not placing your entire order at once, but instead trading in smaller increments to avoid driving the price away from yourself in either direction. Importantly, there is also a regulatory obligation to maintain an orderly market.

The key is to align your order volume with activity in the market. For example, if there’s a pattern of 10,000 to 20,000 shares on the screen either side of the bid or offer, it’s not appropriate to place a trade of 100,000 to 200,000 securities. This could potentially drive the price away from your order as others become aware of it – and make it difficult for it to be filled at the desired price. 

It’s possible, of course, to “tick” your order towards the market as part of this process.

2. Go bespoke

Another option for large orders is to ask your broker to place trades as “icebergs”. This means only part of the order is disclosed and the rest remains hidden.

The minimum disclosed portion of an iceberg order is 500 units of the relevant product. There is no limit to the total order quantity. However, it must not exceed 1,000 times the disclosed portion.

The ASX trading platform prioritises the shown quantity of all orders on screen over all hidden quantities of any order at the same price.

Once the disclosed portion of an iceberg order is traded, the trading system replenishes it at the same price and in the same quantity as the original portion (unless there are fewer units remaining to be traded, in which case all of the remaining amount will be shown). 

As these portions of the iceberg order become disclosed, they are ranked in price/time priority. In other words, they go to the back of the queue at the relevant price level.

This could work, for example, if you want to sell 200,000 shares when the liquidity at each price point is limited to parcels of 5,000 to 10,000 shares. A broker such as AUSIEX can place icebergs on a client’s behalf and do so in odd numbers, so as not to alert the market to the total size of the order. 

The size of an iceberg can be adjusted up or down to facilitate efficient completion of the order.

Another alternative is to ask your broker to place orders directly into the dark markets provided by ASX (ASX Centre Point) or Cboe (Cboe Mid Point). Both have hidden liquidity which is not visible in the screen. 

Algorithmic trading strategies can also be used to execute orders. These strategies use automated and pre-programmed trading instructions to account for variables such as price, timing and volume.

Finally, where appropriate, bulk orders – or orders which aggregate the total number of shares across a client base – might instead be treated as a single order, and then allocated post-trade. For example, advisers may have 15-20 clients with the same exchange traded fund (ETF) holding and opt to trade those holdings together instead of separately at different prices. This will avoid driving the price away from your own order when entering or exiting a position.

Brokers like AUSIEX maintain relationships with market makers and ETF issuers which can provide access to liquidity, primarily for orders. 

3. Pick your moment

The rule of thumb for domestic ETFs is to place an order after 10.20 am (AEST).  Avoid the first 15 minutes of the trading day when ETFs are less liquid and spreads are wider. 

The ASX currently has a staggered open from 10 am in five groups, with the final group opening at 10:09 am +/- 15 seconds. During this time, the market maker will be quoting prices with wide spreads as the full portfolio cannot be accurately valued until all securities are trading. 

If you’re trading US-based ETFs, it’s possible to get a sense of the likely trading direction when the Australian market opens by monitoring the main drivers of overnight trading or following Dow Jones Industrial Average futures. By contrast, depending on market conditions, orders for Asia-based ETFs may be best traded when the underlying market is open.

An alternative strategy is to look at the iNAV (indicative net asset value) for an ETF on the issuer’s website. The iNAV allows investors to track the indicative net asset value of an ETF unit throughout the trading day to help decide when to buy and sell. You cannot buy ETF units at the iNAV as the market maker will always place a spread to provide a return for their services. 

Finally, remember that ETFs are a market-made product, not a stock. The regularity with which an ETF trades is also not a true measure of its liquidity, given the presence of market makers. 

For larger orders, brokers like AUSIEX can contact market makers to facilitate the completion of an order instead of struggling to get your order filled in the market.

Following the rules

Remember that all trading orders are subject to the Australian Securities and Investment Commission’s Market Integrity Rules. You should consider the circumstances of the order, such as:

• if an order would be inconsistent with the history of or recent trading in that product;
• if an order would materially alter the market for, or the price of the product;
• the time an order is entered;
• whether there is a change in beneficial ownership;
• if an order has or is likely to create a false or misleading appearance of active trading.

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