DEFINITION of 'Block'

A block refers to a large order of the same security to be bought or sold by institutional or other large investors. There is no official size designation constituting a block of securities, but a commonly used threshold is more than 10,000 equity shares, or a total market value of more than $200,000.

Blocks of securities are traded in block trades, facilitating trades involving institutional investors or other large investors requiring such bulk trades to meet their needs.

BREAKING DOWN 'Block'

Users of block trades include large-scale portfolio managers and individual investors. Asset managers of large mutual funds, retirement funds, hedge funds, banks and insurance companies take a longer-term view of markets when making investment decisions and take very large positions in a stock once the decision is made. Large corporations that engage in a large stock buyback may also use block trading to execute their transactions. These type of market participants manage hundreds of millions to tens of billions of dollars. Current data shows that approximately 25% of the New York Stock Exchange (NYSE) volume is in block trading.

Advantages of Block Trades

Extreme imbalances in the supply and demand for a particular stock resulting from a large acquisition or liquidation of a stock increase price volatility. When a fund manager decides to acquire a very large position in a stock or needs to liquidate a very large position in a stock that is not performing, prudence demands that the transaction be conducted to minimize the adverse effects on the market price that the overwhelming disparity in supply and demand causes.

All large-scale stock transactions have an optimal average price target set by the fund manager. Creating too much volatility may cause the price to trade away from the desired average price. Using block trades via block houses allows a fund manager to make the needed transactions in such a way that minimizes the impact on price volatility and achieves a better average price.

Execution costs are also a key point of concern. Attempting to fill a very large buy or sell order by breaking it up into smaller transactions ultimately increases costs and may have the same adverse effect on price volatility. Block trading help minimize this effect.

Block Trading Signals

When institutional investors use block trading to fill a very large order over a period of time, price does rally or decline accordingly. Savvy day traders who are quick to spot the increase in volume on one side of the market can exploit the market imbalance and capture some easy low-risk profits from the added volatility and predictable price movements. Traders typically take a position on the same side that the institutional investors are transacting in and ride the price waves with them. Once the institutional investors have filled their large orders, price volatility returns to normal.

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