Key Points

● Block trading refers to a large, privately negotiated securities transaction.

● Block trading takes place outside the open market.

● Generally, buyers in block trades will receive a fill price with a certain discount compared to the market price.

Concept Explanation

Block trading, also known as bulk trading, is a large-scale, privately negotiated securities transaction.

To avoid negative impacts on the public securities market prices, block trading is not conducted in the open market.

Block trading services are generally provided to institutional investors by brokerage firms.

Each exchange has a clear definition of block trades, and they are all different. The New York Stock Exchange and the Nasdaq Exchange define block trades as involving at least 10,000 shares of stock or stock trades worth over $200,000.

In block trades, the prices privately agreed upon by institutional investors can serve as important references for other investors or analysts when valuing stocks. The block trade price can be considered as the price that major shareholders are willing to accept, ignoring the impact of small trades on the price.

Case of block trades

For example, hedge fund Y holds 100,000 shares of stock in company X and wants to sell all these shares at the current market price of $13. Company X has a relatively small market cap, close to $8 million.

If hedge fund Y places an order on the open market, the trade could significantly depress the market price. This is because the trade volume is large enough to significantly impact the supply and demand of X company's stock, rapidly pushing down the stock's fill price.

To avoid this scenario, hedge fund Y can arrange a block trade with another investor (often an institution) willing to buy all 100,000 shares of company X's stock.

In general, block trades are beneficial for both parties: the selling party obtains a more attractive fill price compared to placing an order on the open market, while the buying party can negotiate a transaction price with a certain discount compared to the market price.