Block Trading FAQs

What is Block Trading?

Block trading is the act of aggregating multiple trades together to obtain an average price.

Why should an advisor conduct block trades for a client?

Advisors who are buying or selling a certain equity for multiple clients should utilize block trading, so all clients are able to receive the same average price. This prevents any client from benefiting over another, or what regulators often refer to as “cherry-picking.” Cherry-picking takes place when a certain client or group of clients get better pricing, trades, or allocation opportunities over other clients. This often happens when advisors consistently call their largest clients first to discuss a new trade or opportunity, placing those trades ahead of other clients. If an advisor simply blocks the trades together (even if done throughout the day) pricing discrepancy can be avoided.

If an advisor wants to trade the same security as clients, should they hold their personal trades until the end of the day to ensure they do not trade before the client?

Trading ahead of clients is called “front-running.” This is a broker-dealer/FINRA metric. As a fiduciary, the metric used is whether an advisor got a better price than the client, regardless of when the trade was placed that day. Best practice is for an advisor to block personal trades with the client trades, so everyone gets the same price, eliminating questions of cherry-picking for personal accounts. 

Should an advisor trade their personal securities the day after client trades are placed?

This is not the best practice. It can be a viable solution if an advisor cannot block trades together with client trades, but if an advisor utilizes this threshold and consistently gets better prices than clients it can lead to further scrutiny. The best practice is to simply block personal trades together with client trades, ensuring the same price for all parties.

What if I manage accounts individually instead of using models?

Even if you do not use models, if you want to buy or sell a certain security across multiple accounts, that is a rep-initiated trade, and should be placed in a block to avoid cherry-picking. 

What about client-initiated trades?

If a client unexpectedly contacts you because they have added funds to their account or need to raise money, you should still add a trade in common with other clients to the block trading account at the custodian.  We recognize this is not always possible for client-initiated trades.  You should note your client’s file for these trades as you may still be contacted by compliance about price discrepancies.  Compliance can close-out client-initiated trades if it is not part of a larger pattern of block trading discrepancies.  

How do block trades get submitted?

Submission depends on which platform the advisor is trading on.  Every advisor should have access to a block trading account at the custodian. If advisors are unsure how to access the block trading account, contact Advisory Services (advisoryservices@mutual.group). The block account will allow advisors to place the singular trade (or multiple trades throughout the day) for the total number of shares (“the block”). Once executed, advisors would submit the subsequent “allocation” file, telling the custodial system how to allocate the shares. If an advisor utilizes one of the custodial order management/model trading tools or the Orion Trade Order Management (TOM) system, the allocation files are automatically sent with the block trade, telling the trade system to block the individual equity trades together.

What if a block trade could move the market?

If an advisor believes his or her total block trade could move the market, the advisor should work with the custodian trade desks to enter a Time-Weighted Average Price (TWAP) or Volume-Weighted Average Price (VWAP) trade. The trade desk can time or volume “slice” the trade into smaller chunks and actively work the trades throughout the trading day, attempting to fill the shares without adversely affecting the market. This ensures the market would not see a singular, massive trade. Please note that this approach does not need to be used in all circumstances. If the trade is not going to move the market on a security, the price/share savings is minimal and may be offset by costs associated with utilizing the custodial trade desk.  

Contacts for How To Utilize Trade Systems/Block Trading

*iRebal access must be submitted for by the Advisory Services team

Trade Desk Contact Information

*Trade Errors*

All trade errors must be submitted to Advisory Services and processed through Mutual. For equity trade errors, advisors can instruct the trade desk to place the covering trade to prevent market movement, but the remainder of the trade error must be submitted through Mutual. As the registered investment adviser, Mutual is regulatorily required to track and monitor all trade errors and ensure they are completed appropriately. Therefore, they must be submitted through the team in Mutual’s home office. Advisors should be prepared to communicate the error, cause of the error, and any corrective action taken. Advisory Services will then handle the remainder of the trade correction process.