What Is an Exchange Distribution?

The term "exchange distribution" refers to the sale of a large block of stock or another security that is reported as a large, single transaction immediately after the order is complete. Exchange distributions occur when a broker receives a number of buy orders for the same stock or security and sells them in a single block at the same time. Given the complexity of such a trade, brokers receive an extra commission for distributing orders from the sellers rather than the buyers.

Key Takeaways

  • An exchange distribution is the sale of a large block of stock or another security reported as a large, single transaction.
  • It may appear as a singular position between one buyer and seller, even when it represents multiple buyers purchasing shares from one seller.
  • To report the sales individually by each buyer would skew the overall trading info, inaccurately reflecting the nature of the transaction.
  • Brokers charge an extra commission to the seller for distributing orders, reflecting the greater complexity of the transaction.
  • At least 10,000 shares on a non-penny stock or a bond transaction totaling $200,000 or more count as an exchange distribution.
  • Exchange distributions typically originate from massive hedge funds and institutions because they're usually too large for individual investors to initiate.

How an Exchange Distribution Works

An exchange distribution becomes necessary when an individual or party who holds a significant position in a particular security wants to sell the shares as one transaction rather than splitting 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

Exchange distributions are different from block trades; the former involves multiple buyers while the latter involves a single one.

Large block orders cannot be filled, though, 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 because they're usually too large for individual investors to initiate.

To distribute a large sell order, a broker circulates the asking price to a group of potential buyers. Once the 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.

Most individual investors don't have the sheer volume of securities involved in exchange distributions. This means that if these trades were reported individually, the daily trading data may be skewed. That's why it's important that brokers report these trades immediately after they're complete as one, single transaction.

Special Considerations

Brokers often charge buyers a commission when they execute conventional trades. Though these days, retail investors can transact trades on online brokerage platforms without any commission. These are typically small-sized trades.

But things work a little differently when it comes to exchange distributions and other related trades. 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 executed by a broker.

The responsibility of paying these costs instead falls on the seller of a large block. In fact, the selling broker may require even more compensation to engage the participation of other registered representatives and firms that participate in the transaction.

Exchange Distribution vs. Exchange Acquisition

Buying is the opposite of selling, right? If brokers execute an exchange distribution for large buy orders of the same security, there must be a term that describes large buy orders. The opposite of an exchange distribution is an exchange acquisition. In this kind of acquisition, brokers fill one large buy order by grouping smaller orders from investors willing to sell. These transactions are also reported as one single trade even if multiple sellers were required to fill that order.