A common question among Advisors upgrading from manual trading or single-order entry tools to a trading automation tool like Autopilot is, “What is Block Trading?” In this article, we give a quick overview of what Block Trading is, and why it's beneficial to your practice.
How does block trading work?
With the exception of LPL trade files*, Autopilot dynamically generates block trade files when a block trade can be made. The format of these files is such that both block orders and allocation instructions can be submitted simultaneously and requires no additional work from the Advisor.
Imagine you’re using Autopilot to trade three different clients into the Vanguard Total World Stock ETF ($VT). Autopilot will generate three sets of trades which you can review and approve in your trading dashboard.
Once you’ve approved these trades, Autopilot will automatically combine all ETF/stock orders for $VT into a single trade. This is called a block trade. This block trade is sent to your custodian and posted to your average price account, sometimes called a block account. After posting a block trade, your custodian waits for allocation instructions. Allocation instructions tell your custodian how to divvy up the shares from your average price account into each client sub-account.
Why use block trading?
Block trading prevents accidental price discrimination during trading. For example, if you were to manually place three separate buy orders for $VT, each order will execute at a different price. The variance in execution price is due to intraday price movement in equities, and results in some clients realizing a more preferable cost basis than others - potentially causing issues with the SEC. How does an advisor prove they aren’t giving preferential treatment to one client over another? With block orders this becomes a non-issue. A block order is an instruction to a custodian to take the total number of shares purchased in the block and average the execution prices prior to allocating any shares into client sub-accounts.
Let’s walk through the hypothetical example above so we can see how this works in practice.
1. Advisor approves 3 individual trades for the following accounts... Client account # 12345678 Buy 3,016 shares of $VT Client account # 98765432 Buy 3,016 shares of $VT Client account # 13579014 Buy 3,016 shares of $VT 2. Autopilot creates 1 block trade and 3 allocation instructions... Average price account # 99994456 Buy 9,048 shares of $VT Allocation for client account # 12345678 3,016 Allocation for client account # 98765432 3,016 Allocation for client account # 13579014 3,016 3. Advisor executes the block trade, but the price of $VT moves
from $75.15 - $75.21 between the time the order is submitted and filled. 4. The custodian averages out the execution price at $75.18 5. Advisor uploads the allocation instructions and each client receives
3,016 shares of $VT at an average execution price of $75.18
What about sell orders?
Block trading is used when buying or selling stocks/ETFs. We could replace this scenario with sell instructions, in which case the custodian would average the executed price on the sell order, then divvy up those sells into client accounts.
Block Trading and Mutual Funds
Block trading does not apply to mutual fund orders. Mutual funds are priced once a day, which prevents price discrimination among clients. When using Autopilot to trade accounts that contain both stocks/ETFs and mutual funds, you'll notice that the block orders and mutual funds are both placed on the block file, while the allocation file only contains stock/ETF allocation instructions.
*LPL requires advisors to use the enhanced trading platform for blocking accounts after the trade file is uploaded.