Jolly good question. I don't trade stocks so forgive any howling errors that I am sure to make. I read a couple of books on SOES bandits and the like several years ago (wow what fun they had!) but that's it as far as my stock knowledge goes. But some principles, e.g tape reading, supply/demand dynamic, major groups active in the market, psychology etc. ought to be the same as futures. Apologies to Tim for repeating quite a lot of what you've said already too.
Firstly, I imagine there would be a difference in approach depending on the type of institution buying. If it is say a pension fund then they will have to go through a market maker and agree a price (range?) with him. The market maker is likely to give him as poor an average price as he can get away with in order to further his own profit. Or perhaps they ring that nice man at Merrill who will do the same. However if it is Merrill buying for his company account then he will manage the position himself and try and get the best price he can. But I assume the question refers to the trader's general method of filling the order, whoever it may have come from. Also strategy probably depends on the exchange (e.g NYSE involves specialists, Nasdaq is all-electronic ... I think). Stocks - far too complicated and numerous for me.
Secondly, unless he really doesn't care much about his fill price, his tactics would depend slightly on where the stock was in a price cycle? If the stock is in a strong uptrend making new highs he might do one thing, whereas if it is basing well below a cycle high then he may do another. Different tactics for different context. The general idea is that he has to suss out the market conditions, with an eye on the last few days' action, to see how much supply and demand there is on the sidelines at certain levels. He can and will do this with his own cash if needs be, and fairly imperviously because he has deep pockets and an acutely tuned sense of crowd psychology. If he didn't Merrill wouldn't continue to hire him. He will also likely have several other orders to fill and thus a large advantage that a retail trader does not enjoy.
The below is all guesswork and very general.
Anyway ... obviously he can't step in and buy 200k in one block as he would get a terrible price. I believe traders will be sorely abused by whoever gave them the order for 200k if their average fill price is, say, well above the day's VWAP as samtron mentioned.
So he has to start a campaign to accumulate in small blocks while masking his intention as a strong buyer.
For if it becomes obvious to other traders that he is a large genuine buyer then they will naturally try and front run him or simply buy knowing his big block must increase the price as he works the order.
The last thing he wants is his buying (or even just his intent to buy, if he betrays this) to drive price up and create additional demand, thus making his subsequent buys more and more expensive.
So I guess he would need to encourage weak longs to dump their holdings and new weak shorts to be opened in order to drive the price down and create temporary supply for him to buy from. He can do this by manipulating crowd psychology in a number of ways.
One way: Perhaps he starts this of by bursts of aggressive selling at a popular technical level, e.g a round number or established support. Selling to beget selling, kind of a loss leader. This will cost him but should reward him later if he has judged the conditions correctly. Then perhaps having loosed a few of the naivest stops he temporarily goes on the offer as a precaution and keeps refreshing every time someone takes 200 or so. This makes him look like a real and continued seller and discourages the slighly more sophisticated from bargain hunting following the break while encouraging further sellers who misread his intentions as he'd hoped.
So the price continues to fall as increasing numbers of naive weak hands are attracted to the short side by the deliberately tempting technical break and shiny price action. He stops offering as momentum picks up - after all he is ultimately trying to buy and cheaply. The price is indeed getting cheaper. So (or even while offering) he stealthily goes on the bid as well, perhaps thru another ECN, picking up a little at a time to fill the order in say blocks of 500. He has successfully dislodged some supply and hoovers it up quietly "una fagiola" at a time.
Eventually the supply will probably dry up and demand will come back in. If he has managed to build most or all of his postion he may actually put a large bid in below the market, now making him look like a buyer - which he was all along but only now does he want this to look obvious, because he now has a large long postion and does not want to create more supply which would go against his long - thus causing the fresh demand of others to take the price back up.
Essentially he keeps buying in small blocks as supply becomes available on pullbacks (that he may help create by initially, say, making it look like he is a big seller) then when the buyers come back in he eventually resells some of his position to the usual latecomers who have been waiting for their stoch crossover or whatever. So he is selling say 500 for every 1000 he buys all day surfing around the tops and bottoms of the pullbacks and impulses and slowly filling his order at a number of price levels, trading both ways while he does so. And because he has the size to test supply and demand (go fishing) at key levels he may be able to coax the crowd into doing some of the hard work for him.
Or perhaps I'm overcomplicating everything as usual and he simply looks to buy as much as he can in small blocks at favourable prices, e.g every time the stock trades at a certain percentage deviation from a mean, or something similarly mathematical. Techniques probably vary from house to house in fact?
I hope mr marcus responds to this question as he will no doubt have an interesting take on it and correct my manifold misconceptions.
I look forward to the answer Grey1, I find this stuff fascinating.
