What is Block Trading Facility (BTF)
A block trading facility is a wholesale trading facility that allows traders to buy or sell large numbers of securities bilaterally outside of the public market. Because trades conducted in a block trading facility are typically between two parties, prices are set with certainty and execution is done without delay. Institutional investors use block trading facilities for transactions involving large numbers of shares.
BREAKING DOWN Block Trading Facility (BTF)
When shares are traded in a block trading facility, they are transacted in large lots. The size of the lots can vary, but traders are generally not permitted to aggregate multiple, separate orders in an effort to meet minimum volume requirements. Securities traded though a block trading facility are not subject to market fluctuations because they are not publicly visible, making this sort of trade more like a private contract between two parties. However, because of the nature of block trading facilities, block trading activity can have a considerable effect on the financial markets.
A block trading facility is usually a type of brokerage firm, or a specialized brokerage firm department, that deals primarily in large trades, with clients ranging from corporations and banks to insurance firms and academic funds. Some investors and analysts try to follow the money or stay ahead of market trends by watching block trade activity.
How Block Trade Facilities Work
Block trading facilities keep traders on staff who are well versed in managing trades of this size. Staffers provide a block trade facility with special access to other traders and other firms that allow the company to trade these large amounts more easily. Thus, when a large institution decides to initiate a block trade, it will reach out to the staff of a block trading facility, trusting they will collectively help get the best deal. Once an order is placed, brokers at a block trade facility contact other brokers who specialize in the specific type of security being traded, and the expert securities traders fill the large order through several sellers.
If, for example, Bank of America wants to initiate a block trade of 10,000 shares at $10 a share, it will contact a block trade facility for help. The staffers at the block house break up the large trade into manageable chunks, in this case, five smaller blocks of 2,000 shares, at $10 a share. Each one of the blocks will be initiated with a separate broker, thus keeping market volatility low.