Block Trade

What Is a Block Trade?

A block trade is the sale or purchase of a large number of securities at a preset price.

Key Takeaways

  • A block trade is the sale or purchase of a large number of securities at an arranged price between two parties. 
  • Block trades are generally broken up into smaller orders and executed through different brokers to mask the true size.
  • Block trades can be made outside the open market through a private purchase agreement.

Block Trade

Understanding Block Trade

Block trades typically involve a large numbers of equities or bonds being traded at an arranged price between two parties. They are sometimes done outside of open markets to lessen the impact on the security's price. A block trade involves at least 10,000 shares of stock, not including penny stocks, or $200,000 worth of bonds. Most block trades far exceed 10,000 shares.

Due to the size of block trades, both on the debt and equities markets, individual investors rarely, if ever, make block trades. They are usually carried out by hedge funds and institutional investors via investment banks and other intermediaries.

When block trades happen an open market, volume will fluctuate, affecting the prices of the shares or bonds being traded. Therefore, block trades are usually conducted through an intermediary, rather than the hedge fund or investment bank purchasing the securities normally, as they would for smaller amounts.

These intermediaries, or blockhouses, specialize in initiating large trades carefully, so as to not trigger a volatile rise or fall in the price of the security. Blockhouse staff traders have experience managing trades of this size. Staffers provide a blockhouse with special relationships with 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 blockhouse, trusting they will collectively help obtain the best deal. Once an order is placed, brokers at a blockhouse 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. This often involves iceberg orders that mask the actual volume of stock being moved.

Block Trade Example

A hedge fund wants to sell 100,000 shares of a small-cap company around the current market price of $10. This is a million dollar transaction on a company that may only be worth a few hundred million in total, so the sale would probably push down the price significantly if entered as a single market order. Moreover, the size of the order means it would be executed at progressively worse prices as the market making took place. So the hedge fund would see slippage on the order and the other market participants might pile on, shorting the stock based on the price action, forcing the stock down further.

To avoid this, the hedge fund can contact a blockhouse for help. The staffers at the blockhouse break up the large trade into manageable chunks. For example, they might make 50 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. Alternatively, a broker can step in and arrange a buyer willing to take all 100,000 shares through a purchase agreement arranged outside the open market. This is usually another institutional investor, of course, due to the large amount of capital involved.