What Is a Block Trading Facility (BTF)?

A block trading facility, commonly offered by futures exchanges, allows parties to bilaterally engage (buy/sell) in large transactions outside of public order books in order to avoid an outlier price point that might temporarily affect that security's price.

Key Takeaways

  • A block trading facility, commonly offered by futures exchanges, allows parties to bilaterally conduct large transactions outside of the order books in order to avoid an outlier price point that might temporarily affect that security's price.
  • Transactions conducted in a block trading facility are typically between two parties, prices are set with certainty, and execution is done without delay.
  • A block trading facility is usually a type of brokerage firm, or a specialized brokerage firm department, that deals primarily in large trades. Their clients range from corporations and banks to insurance firms and academic funds.

Understanding Block Trading Facilities (BTFs)

Transactions in a block trading facility are conducted 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.

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 through a block trading facility are less subject to market fluctuations because they are not visible on the exchange's public order books, making this sort of trade more like a private contract between two parties.

A block trading facility is usually a department of a brokerage company, or a specialized brokerage firm, that deals primarily in large trades. Clients may range 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. 

Because they are not settled on public order books, block trades are less likely to cause major price swings. However, because of the nature of block trading facilities, block trading activity can have a considerable effect on the financial markets. Block trades must be reported promptly to the block trading facility, and trading data is usually published alongside daily exchange volume.

Although block trades are not settled on exchange order books, they are typically reported alongside the exchange's public trading data.

Process Followed in Block Trading Facilities (BTFs)

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. 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, who then fill the large order through several sellers. Large orders may be broken down into smaller pieces, allowing one institutional buyer to settle orders on behalf of many clients at once.

For example, if Bank of America wants to initiate a block trade of 1,000,000 shares at $10 a share, it will contact a block trade facility for help. The staffers at the blockhouse break up the large trade into manageable chunks, in this case, that may result in 100 smaller blocks of 10,000 shares, at $10 a share. Each one of the blocks will be initiated with a separate broker, thus keeping market volatility low.

Example of a Block Trading Facility (BTF)

Many public exchanges also maintain block trading facilities for large clients. The Block Trading Facility of the Australian Securities Exchange traded over one million contracts in 2020, according to the exchange's reports. While these trades are settled outside of the ASX's order books, they are still reported along with the rest of the exchange's market data.

NASDAQ, the world's second-largest stock exchange, also has a BTF called NASDAQ Private Markets. This specialized marketplace, geared towards accredited and institutional traders, reported trades worth $30 billion in the first three months of 2021.