What is a '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. Securities traded in block trades facilitate trading by institutional investors or other large investors that require 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 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. This type of market participant manages hundreds of millions to tens of billions of dollars. Current data show that approximately 25% of the New York Stock Exchange (NYSE) volume is block trading.

Advantages of Block Trades

Extreme imbalances in the supply and demand for a particular stock result from a large acquisition or liquidation of a stock, which increases price volatility. When a fund manager decides to acquire significant stock or seeks to liquidate substantial stock that is not performing, prudence demands that the transaction be conducted in a way that minimizes 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 concern. Attempting to fill a 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 helps to minimize this effect.

Block Trading Signals

When institutional investors use block trading to fill a large order over a period, the price will 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 as the transacting institutional investors and ride the price waves with them. Once the institutional investors have filled their large orders, price volatility returns to normal.

RELATED TERMS
  1. Block House

    A block house is a brokerage firm that specializes in locating ...
  2. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network ...
  3. Bagging the Street

    Bagging the street is when an investor or a trader trades securities ...
  4. Split Block Pricing

    Split block pricing divides up a large order of securities into ...
  5. Blocked Period

    Blocked period refers to a length of time in which an investor’s ...
  6. Block Reward

    Bitcoin block rewards are the new bitcoins that are awarded by ...
Related Articles
  1. Trading

    What is the Difference Between the two?

    The differences between retail and institutional traders lay in the size of the trade, level of sophistication, and the speed of transactions.
  2. Tech

    How Bitcoin Works

    Miners, hashes, keys, cold storage, blocks - it's confusing. We can help you understand how bitcoin works.
  3. Tech

    What is a Distributed Ledger?

    Blockchain technology has come a long way from the obscure corners of the web it was once confined to. But what is it? And what about nonces, hashes and ledgers?
  4. Tech

    How Does Blockchain Work?

    Blockchain technology supports the cryptocurrency space and many other promising applications.
  5. Tech

    Bitcoin vs. Bitcoin Cash: What's the Difference?

    We break down the difference between bitcoin and bitcoin cash, and what it might mean for the future of cryptocurrencies.
  6. Tech

    Bitcoin Is Dead? Not A Chance

    The price of the digital currency, Bitcoin, fell from around $450 to below $380 late last week following the departure of long-time developer Mike Hearn.
  7. Investing

    Institutional ownership: Pros and cons

    Institutional ownership can both create and destroy value for shareholders. Learn how to stay ahead of the game.
  8. Investing

    How Statistical Arbitrage Can Lead to Big Profits

    Statistical arbitrage is one of the most influential trading strategies ever devised. Learn how it is leveraged by investors and traders seeking profits.
  9. Investing

    Salesforce Execs Take Advantage of Market Rally

    Salesforce stock has increased by double digits during the first four weeks of January. Company executives have been selling shares during the rally.
  10. Investing

    AT&T Rolls Out Spam Blocker For Mobile Phone Customers (T)

    AT&T is rolling out a new call blocking feature to prevent spam on mobile phones.
RELATED FAQS
  1. How does a block chain prevent double-spending of Bitcoins?

    Find out how double-spending is prevented in the Bitcoin server and how transactions are posted and verified on the Bitcoin ... Read Answer >>
Trading Center