What Is a Block Positioner?
A block positioner is a dealer who, in order to facilitate a customer's large purchase or sale that could disrupt the market, takes positions for their own account in the hopes that they might eventually turn a profit.
- A block positioner is a dealer who, in order to facilitate a customer's large purchase or sale, takes positions for their own account
- Aside from preventing potential market disruption, block positioners seek to profit from their actions.
- Block positioners aim to unload the position quickly, and typically use hedging strategies—such as arbitrage techniques or options—to reduce the risk associated with positions.
- Traditionally, prime brokers have played the role of block positioner, agreeing to commit capital to their clients (such as hedge funds) in order to facilitate block trades for them.
Understanding Block Positioners
Traditionally, prime brokers have played the role of block positioner, agreeing to commit capital to their clients (such as hedge funds) in order to facilitate block trades for them, although a few other broker-dealers have also carved out a niche in executing block trades. (A prime brokerage is a bundled group of services that investment banks and other financial institutions offer to hedge funds and other large investment clients that need to be able to borrow securities or cash in order to engage in netting to achieve absolute returns.)
Block trades (also called block orders) are large orders in the underlying security (bonds or stocks) that a client seeks to execute in its entirety. Because of their large order size, these trades may artificially move the market. It's also possible that market participants who get wind of the desire to trade a large block may front-run the order (to the block trader's detriment).
Therefore, if a block trade is attempted in the open market, traders must practice caution. Consequently, block trades are usually conducted through an intermediary—i.e. a block positioner—rather than a hedge fund or investment bank purchasing the securities normally (as they would for smaller amounts).
Types of Block Positioners
Sometimes, the block positioner can be an inter-dealer broker (IDB), who takes an agency role and tries to cobble together a group of counterparties—each of which is willing to participate in some portion of the block trade (but without committing any capital). This is especially relevant in options markets, where a trader may seek to buy or sell thousands of contracts.
Other times, the block positioner is a client's prime broker (usually an investment bank or large financial firm) who will agree to take down the entire trade at once. Sometimes, these trades will be executed through dark pools or electronic communication network (ECN) matching systems (so as not to disrupt the regular market activity by introducing a large trade).
Sometimes, a prime broker will ask a specialized block positioner situated on the floor of a stock exchange—known as a wholesale broker—to "cross" a large number of shares of stock at a pre-determined price, which may be different from the current market price. Often, these wholesale brokers will operate on "away exchanges," such as the Philadelphia Stock Exchange.
Regulations Governing Block Positioners
Block positioners can take on considerable risk in exchange for the profits they seek. Any firm involved in block positioning must:
- Register as a broker or dealer with the Securities and Exchange Commission (SEC) and also with the New York Stock Exchange (NYSE) if it is a member firm.
- Must be in compliance with Rule 15c3-1 for market makers and have a minimum available capital of $1 million.
- Engage in buying, or selling short, from or to a customer a block of stock with a current market value of $200,000, or more, to facilitate a sale or purchase by that customer.
- Seeks to sell the shares comprising the block as quickly as possible and meet other regulatory conditions prior to the sale of that block.
The dealer takes on the risk of the securities in order to help clear the trade for the seller. Block positioners aim to unload the position quickly, and typically use hedging strategies, such as arbitrage techniques or options, to reduce the risk associated with positions.