What is an 'Exchange Distribution'

Exchange distribution is a type of trade make on a stock exchange where one large block of shares is sold by pooling multiple buy orders and then immediately reporting the trade as one transaction.

These orders may be placed when a broker receives a request to sell a large block of stock, or other security, in one single transaction. If the order is significant, however, it may be necessary to match many smaller blocks of shares bid by multiple buyers. The grouping and execution of these more modest transactions show as a single transaction. Given the complexity of such a trade, brokers receive an extra commission for distributing orders.

BREAKING DOWN 'Exchange Distribution'

Exchange distribution becomes necessary when the holder of a significant position in a security wants to sell those shares as one transaction, rather than to split the request into multiple trades. The order may be similar in size to a “block trade,” which may be sold to only one buyer, and may not even occur on the open market.  

Often, however, large block orders cannot be filled unless there are multiple buyers who each want to buy a portion of the shares. Although there is no exact definition of how many shares create a "block," it usually involves at least 10,000 shares on a non-penny stock, or a bond transaction totaling $200,000 or more. These trades typically originate from massive hedge funds and institutions.

How Exchange Distribution Works

To distribute a large sell order, a broker circulates the asking price to a group of potential buyers. Once matching of enough orders is complete, it can report on the exchange as a single trade. This grouping can create the appearance of a singular position between one buyer and one seller, even when it represents many different buyers purchasing shares from one seller.

Buyers often have an incentive to participate in purchasing a portion of a large block of shares because they usually do not have to pay a commission on the transaction. The seller of a large block traditionally pays those costs. In fact, the selling broker may require even more compensation to engage the participation of other registered representatives (RR) and firms in participating in the transaction.

The opposite of exchange distribution is exchange acquisition. In such an acquisition, brokers fill one large buy order by grouping smaller orders from investors willing to sell. Those transactions are also reported as one single trade even if multiple sellers were required to fill that order.

  1. Block House

    A brokerage firm with the primary focus of locating potential ...
  2. Block Order

    A block order is a large order placed for sale or purchase of ...
  3. Executing Broker

    An executing broker is a broker that processes a buy or sell ...
  4. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network ...
  5. Negotiated Market

    A negotiated market is a type of secondary market exchange in ...
  6. Block Explorer

    A block explorer is a website that allows users a real-time, ...
Related Articles
  1. Trading

    High-Frequency Trading: A Primer

    An in depth look at how high-frequency trading works and who the players are.
  2. Trading

    Principal trading and agency trading

    Ever wonder what happens behind the scenes when you buy or sell a stock? Read on to find out.
  3. Trading

    The Basics of the Bid-Ask Spread

    The bid-ask spread is the difference between the bid price and ask price prices for a particular security.
  4. Insights

    The NYSE and Nasdaq: How They Work

    Learn some of the important differences in the way these exchanges operate and the securities that trade on them.
  5. Investing

    The Opening Cross: How Nasdaq Stock Prices Are Set

    Learn how the opening cross auction process determines prices of Nasdaq-listed securities at market open to ensure liquidity by matching buyers and sellers.
  6. Investing

    The 4 Ways To Buy And Sell Securities

    Know the four main avenues of buying and selling investment instruments.
  1. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  2. The difference between a market order and limit order

    Market orders execute a trade to buy or sell immediately at the best available price. A limit order only trades when the ... Read Answer >>
  3. Why do limit orders cost more than market orders?

    Learn the difference between a market order and a limit order, and why a trader placing a limit order pays higher fees than ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center