What Is a Block Trade?
A block trade is a private securities transaction that involves large amounts of shares. Executed away from public markets, these transactions reduce the immediate impact on a security’s price. Typically conducted by hedge funds and institutional investors through investment banks and other intermediaries, high-net-worth accredited investors can also engage in block trades.
The New York Stock Exchange and Nasdaq consider a block trade to involve a minimum of 10,000 shares or a total worth exceeding $200,000. Most block trades, however, surpass these thresholds.
Key Takeaways
- A block trade is a substantial, privately negotiated securities transaction.
- Generally, block trades are fragmented into smaller orders and executed via various brokers to disguise their actual size.
- Block trades can be executed outside public markets through private purchase agreements.
Understanding Block Trades
Large stock orders placed directly on an exchange could drastically affect the share price. Conversely, privately negotiated block trades often offer buyers a discount without alerting the market to increased supply until the transaction is publicly recorded.
Undisclosed block trades are viewed as material non-public information. The Financial Industry Regulatory Authority (FINRA) restricts the disclosure of this information to prevent front running.
Specialized intermediaries like block trading facilities and block houses can manage block trades. Block houses function within brokerages and adopt dark pools to match large buy and sell orders away from public scrutiny. They can also split massive trades into smaller, discrete sell orders using methods like placing multiple iceberg orders.
Block Trade Example
Imagine a hedge fund wishes to sell 100,000 shares of a small-cap company, trading near $10 per share. This transaction, valuing at one million dollars, could significantly drop the share price if placed as a single market order due to increased supply. Additionally, the sizeable order would likely be filled at increasingly unfavorable prices, resulting in slippage for the hedge fund and potentially triggering short-selling activity by other market participants.
To prevent this, the hedge fund could approach a block house. The block house would split the large trade into smaller, manageable parts. For instance, they might divide the trade into 50 smaller offers of 2,000 shares, each listed by a different broker to maintain anonymity.
Alternatively, another broker could identify an institutional investor willing to purchase the entire 100,000 shares outside the open market at a prearranged price.
Related Terms: institutional investor, accredited investor, dark pools, front running, block trading facility.
References
- CME Group. “Block Trades - What is a Block Trade?”
- CMC Markets. “Block Trades”.
- New York Stock Exchange. “Information Memo, Rule 72(d): Block-Sized Agency Crossing Transactions”, Page 1.
- NasdaqTrader.com. “Monthly Market Summary Definitions & Data Fields”.
- FINRA. “5270. Front Running of Block Transactions”.
- SoFi. “What Is a Block Trade”.
