What Is a Block Order?

A block order is placed for the sale or purchase of a large number of securities. Block orders are sometimes used for the sale or purchase of more than 10,000 shares of the same stock or $200,000 (or more) worth of fixed-income securities.

A block order is also known as a block trade.

Key Takeaways

  • Block orders are used to buy or sell large quantities of securities, typically 10,000 shares or more or $200,000 (or more) of fixed-income securities. Actual block trades can be much bigger.
  • Block orders are often broken up by an intermediary to lessen the market impact, or the transaction is matched via a dark pool or intermediary. For small orders, an iceberg order or other routing solution is used to take advantage of current liquidity.
  • Block orders are mainly used by institutional investors, although block trading tools are available to retail traders through some brokers.

Understanding the Block Order

Typically, a 10,000 share order (excluding penny stocks) or $200,000 worth of fixed-income securities, or more, would constitute a block order. These trades are often placed by institutional investors managing large portfolios. When a trader or investor wants to unload his or her securities quickly they will often sell them at a discount, aptly named a "blockage discount." A block order can also be used to buy a security, which will typically hold the price up or push it up due to the increased demand for the security from the order.

Block orders are entered via a special system, or handed off to an intermediary, and the shares are awarded an average price per share, which is the weighted price of all the executions it takes to fill the order. The buying or selling party has control over how they input the order or in how they direct the intermediary to handle the order. Although, since large orders can significantly impact the price of a security, the block order user may not always get the number of shares they want and/or the price they want.

Block orders are also often executed off the exchange, but still must be reported to the exchange. For example, one hedge fund may have to sell 100,000 shares of a security, while another party is willing to buy 100,000. The parties may post their interest on a dark pool or with an intermediary. If the dark pool or intermediary finds a match, the trade occurs at a specified or matched price, or sometimes at the mid-point price between the bid and ask. If the transaction occurs outside of the exchange, then the transaction must still be reported to the exchange in a timely fashion.

If an intermediary is used, sometimes referred to as a blockhouse, the intermediary may find someone to take the other side of the transaction, or they may cut the order up into smaller chunks and then send it to multiple brokerages or electronic communication networks (ECNs) to disguise the size of the order and its originator. They may send these smaller orders out at different times and at different prices to lessen the market impact of the order.

Block orders are rarely required by retail traders, and are mainly used by institutional traders. While this is the case, some brokerage houses offer block trade capabilities to retail traders via iceberg orders or routing solutions that fill orders over time within a specified price range as liquidity comes available.

Example of an Institutional Block Order in the Stock Market

Assume that a hedge fund needs to sell two million shares of Netflix Inc. (NFLX). At the time of the sale, the average daily volume is about five million shares. Therefore, trying to sell the shares at one time would trigger a significant selloff as about 40% of the daily average volume would be pushed through instantly. Therefore, simply using a market sell order, or even an iceberg or limit order isn't likely to work.

The hedge fund opts to call a blockhouse and have them execute the transaction. The blockhouse, who is aware of other buyers and sellers in the stock, may know of buyer who would be interested in buying the shares. In this case, the intermediary could find an agreed price between the two parries and they make a trade outside the exchange. This results in no market impact, and the two parties end up with the transaction they want.

If the intermediary can't find a buyer or sell for an off-exchange transaction they may try a dark pool. Since dark pools don't reveal how many shares are in order, they can post a large quantity of shares which are free to the transact with opposing orders that are posted on the dark pool. This may be used exclusively or combined with breaking up the order further and posting it on other ECNs, and with different brokers, over time and at different prices to hide the size of the order and the person or institution that is selling.

Assume the stock is trading around $310 when the block order is placed to sell two million shares. The intermediary breaks up the order and is able to sell the shares at an average price of $309. Because the order was broken up and executed over time, on different venues, it had much less of a market impact than selling all the shares at once. If there was a strong demand for the stock, the intermediary may even be able to sell the shares at higher and higher prices, getting an average price of $311 or $315, for example.