What is a block trade?

A Block Trade is a huge transaction involving securities that is conducted outside the open market. The aim is to minimize the impact on the security price. In this context, the term “securities” refers to company shares, bonds, equities, derivatives, commodities futures, options, and exchange-traded funds (ETFs).

In a block trade, the security price has been arranged between two parties. These trades may be arranged through private transactions, an intermediary, such as an investment bank, or specialized facilities within stock exchanges.

Wikipedia has the following definition of the term:

“A block trade is a high-volume transaction in a security that is privately negotiated and executed outside of the open market for that security. Major broker-dealers often provide “block trading” services — sometimes known as “upstairs trading desks” — to their institutional clients.”

Block trades – huge volumes

Block trades are used by institutional investors who deal with large quantities of securities. Institutional investors are organizations that invest large sums of money in securities or other investment assets on behalf of their members or stakeholders. Examples include mutual funds, pension funds, insurance companies, banks, and hedge funds.

These transactions can range from ten thousand to hundreds of thousands of shares. If conducted in the open market, they could significantly affect the stock’s price due to supply and demand dynamics.

To avoid this, the parties arrange the transaction privately. They also agree to a price that is different from the market’s current price.

Two traders shaking hands plus a definition of Block Trade
Image created by Market Business News.

What size defines a block trade?

So, how big does a trade need to be for us to call it a block trade? This depends on the type of security and where it is traded. The definition varies by country, with each having its own rules and thresholds set by regulatory authorities and exchanges.

According to the New York Stock Exchange, a transaction worth at least $200,000, or one consisting of at least 10,000 shares of a given stock, is a block trade.

Pros and cons

Transaction costs are lower with block trades, and the settlement process is swifter. However, there is also a risk of a less favorable price compared to what might be obtained in the open market.

A major challenge can be keeping the details of the transaction secret, that is, preventing information about the trade from affecting the market.

Conclusion

In summary, block trades are important tools for large-scale investors to execute major transactions efficiently.

They are carried out carefully and privately to maintain market stability and are a fundamental aspect of modern financial markets.

Two Videos

These two interesting video presentations, from our sister YouTube channel – Marketing Business Network, explain what ‘Trade’ and ‘Securities’ are using simple, straightforward, and easy-to-understand language and examples.

  • What is (a) Trade?

  • What are Securities?