DEFINITION of Blockage Discount

A blockage discount is the difference between the market value of a traded security and its sale price when a large block trade occurs. The discount is justified because the block is so large that it may not be sold without depressing the value of the stock. Typically, large block trades involve institutional investors. A blockage discount is negotiated by the institutional investors who are involved.

BREAKING DOWN Blockage Discount

A block trade is defined as 10,000 shares, or in the bond market, securities valued over $200,000. Traders usually want to unload all of the securities quickly but are often inhibited by low market volume. If volume is low, a large sale holds the potential to significantly depress the price. So, recognizing that selling the entire block in a hasty manner in the market would cause the price to fall anyway, a trader will sell the assets at a discount to another institutional investor, thus completing the trade quickly. Alternatively, the trader could sell the block in small amounts over an extended period. But this also presents risks, given that the price of the security may decline anyway for reasons unrelated to the block sale.