What Is a Block Trade? – Everything You Need to Know

The trading industry is full of many types of transactions and trades. Have you heard anything about Block Trade? Let’s dive in. Block trading is a significant, privately negotiated transaction of securities. Typically, block trading takes place in public markets. This is to reduce the effect on the price of securities. Hedge funds and institutional investors usually carry them out; Through investment banks and other intermediaries. High-value accredited investors may also be eligible to participate.

Block trading is defined by the New York Stock Exchange and the Nasdaq. This is like a promotion that includes a minimum of 10,000 shares or is worth more than $200,000. It is worth noting that most block trades far exceed this minimum.

A bulk sale order placed on the stock exchange can significantly impact the stock price. In contrast, while block-trading through private negotiation often provides the buyer with a discount on the market price; It does not notify other market participants of additional supply until the transaction is publicly recorded.

Block-trading is non-public information. Therefore, FINRA prohibits the disclosure of information such as previous launches. Block-trading facilities and block-houses are specializing intermediaries that can facilitate block-trading. Blockhouses are divisions in brokers. They run private exchanges where large buy and sell orders can be matched without public visibility. Blockhouses can also break up huge trades on public markets to conceal the scope of additional supply, for example, by placing several iceberg orders.

Example of The Block Trade

The hedge fund wants to sell 100,000 shares of the small capital company for close to $10 at its current market price. This is a million-dollar transaction on the company; Which can only cost a few hundred million. So selling will probably significantly reduce the price if filed as a single market order. Moreover, the size of the ruling means that it will be executed gradually at worse prices; Once the demand runs out at $10 on the requested price. So the hedge fund will see an order drop. Consequently, other market participants may reduce stocks based on price action; Also force the price to fall further.

The hedge fund can turn to the blockhouse for help to prevent this. The employees of the blockhouse divided the large trade into manageable parts. For example, they could divide a block trade into 50 offers of 2000 shares; To further disguise their origin by each different broker published. Alternatively, the broker could find a buyer who wants to buy all 100,000 shares at an open market price. This will usually be another institutional investor.