What is a block trade?
A block trade is a large-scale, privately negotiated security transaction.
Block trades are defined by the New York Stock Exchange or the Nasdaq as any trade involving more than 10,000 shares of stock or more than $200,000. HTML4 The majority of block trades go well beyond these minimums.
Understanding Block Trades
An outsized effect on share prices could be caused by a large-scale sell order on a stock exchange. A block trade, however, is a private transaction that will sometimes provide a discount on the market price to the buyer. However, the seller will not be able to inform the other market participants until the transaction has been recorded publicly.
Block trades that are not publicly disclosed are considered non-public information. FINRA, the self-regulatory body for the financial industry, prohibits disclosure of such information as 5
Block trading houses and blocks houses can facilitate block trades. Block houses are divisions within brokerages that manage dark pool, private exchanges where large orders can be matched.
Block trade example
A hedge fund is looking to sell 100,000 shares in a small cap company at the current $10 market price. This transaction is worth millions of dollars and would likely push the price down significantly if it were done as a single market order. The order’s size means that it will be executed at increasingly lower prices once demand has been exhausted at $10. The hedge fund would notice slippage in the order, and other market participants might pile up, shorting stock based upon the price action and pushing the price further down.
Block houses can be contacted by hedge funds to help avoid this. The staff at a block house would help break down large trades into smaller chunks. To further conceal their origin, they could split the block trade into 50 offers each of 2,000 shares.
A broker might also be able to find a buyer who is willing to purchase all 100,000 shares at a price that is not available on the open market. This would usually be an institutional investor.