Stock market trading is often portrayed as a frenzied, urgent activity. The reality is very different – and it’s a lot calmer than you may think.
Technology has driven equity trading from the stock exchange floor into trading rooms serviced by highly-powered computers. The book ‘Flash Boys’ by Michael Lewis brought the world of high-frequency trading (HFT) into the public eye, so too has the rise of alternative trading venues. These alternative venues are now a large part of the market liquidity and can lower the cost of execution for investors.
Getting the best possible price for the block of stock we are looking to buy or sell is obviously a key factor for a dealing function, but so too is sourcing liquidity.
There are various ways we can access different pools of liquidity and block trading via brokers remains a pivotal function. The ability of brokers to discretely source blocks of stock on behalf of traders is essential. The value of strong relationships with a trusted group of executing counterparties cannot be overestimated.
Being patient is not a virtue typically associated with trading. The perceived objective is to deploy capital as quickly as possible without making a market impact. We are able to move quickly when we need to, but much of our activity takes place at a more measured pace. The concentrated nature of the Woodford Equity Income portfolio means that we have large stock positions and, unless we are careful, our trading activity can move the price of stocks in which we are trading. We have to be patient.
Building our initial position in Cranswick, the food producer, is a good example. The original order was to buy 400,000 shares worth c. £5m. Although this appears to be a relatively small position, Cranswick is a very illiquid stock. The average daily volume on the London Stock Exchange (LSE) in the year prior to the fund’s launch was just 45,000 shares. Cranswick may manufacture premium pork products, but we were determined not to pay a premium for the shares. We began buying the stock on 20 June and finally completed the order on 15 August1.