DEFINITION of 'Split Block Pricing'

Split block pricing is the act of dividing up a large order of financial securities (also known as a block) into several smaller lots so that a large trade can find more liquidity, such that each portion may be traded at different prices. The ultimate effect of using a split block pricing method is that the trader will receive the order at a price equaling the weighted average price of each piece of the block that is traded. In some cases, split block pricing would be used on a large trade order in order to match smaller positions desired by counter-parties to the transaction.

One common type of a split block pricing strategy is the volume weighted average price, or VWAP. The volume weighted average price is a strategy  used primarily by institutional investors such as mutual funds to make large purchases and sales in a security so as not to influence the market prices with the order. It is the calculated as the average share price of a stock weighted against its trading volume within a particular time frame, generally one day, and is frequently employed with the aid of execution algorithms or an inter-dealer broker. Split block pricing is employed in several types of markets including stocks, options, and bond markets.

BREAKING DOWN 'Split Block Pricing'

Example of Split Block Pricing

For instance, a trader at a large mutual fund's trading desk wants to purchase 50,000 shares of ABC Inc., but she knows that entering this order as a market order will move the market quite a bit higher unnecessarily, and posting a limit order to buy will expose her hand. Instead, she seeks split block pricing using the volume weighted average price method. There are several steps involved in the VWAP order. First, she must calculate the usual price and volume (the number of shares traded over some period) for a typical trading day in ABC shares. This is usually estimated using the average of the daily high, low, and closing price, multiplied the period's average volume. Next, she will keep a running total of these values and volumes, known as a cumulative total. Finally, she will need to divide the running total of average price by the running total of average volume. The formula given for these steps is summarized as:

Another example comes from the options markets. Say a trader wants to sell 1,000 call options of XYZ corp, assuming that the only two buyers of the XYZ options want to buy 600 options at $5.00 and 400 more options at $4.95; the order will be split into two blocks of 600 and 400 contracts, respectively and the selling trader would receive proceeds of $501,000 ((400 x $4.95 x 100) + (600 x $5.00 x 100)), or an average price on the split block of $5.01.

RELATED TERMS
  1. Block Trade

    A block trade is an order or trade for sale or purchase of a ...
  2. Block

    A block is a large amount of the same security bought or sold ...
  3. Block Trading Facility (BTF)

    A block trading facility is a wholesale trading facility that ...
  4. Block House

    A block house is a brokerage firm that specializes in locating ...
  5. Blocked Period

    Blocked period refers to a length of time in which an investor’s ...
  6. Blockage Discount

    A blockage discount is the difference between the market value ...
Related Articles
  1. Investing

    If You Had Invested in NVIDIA Right After its IPO

    A $2,000 investment Nvidia in 1999 would have grown to nearly $275,000 in 2017.
  2. Investing

    If You Had Invested Right After Apple's IPO

    If you had purchased 10 shares of Apple at its IPO price of $220, you would be looking at a payoff of over $100,000. Here's a breakdown of the company's growth and stock splits.
  3. Tech

    What is the Genesis Block in Bitcoin Terms?

    Learn more about the Genesis Block, the original Bitcoin block.
  4. Investing

    If You Had Invested Right After JPMorgan's IPO (JPM)

    Find out how much your investment would be worth in 2016 if you had purchased 100 shares during JPMorgan's IPO, including the impact of dividends and splits.
  5. Tech

    Winklevoss Gemini Fund to Offer Bitcoin, Ethereum Block Trading

    The digital asset exchange will allow investors to place orders outside the project's order book.
  6. Trading

    High-Frequency Trading: A Primer

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

    Why limit orders may cost more than market orders

    Learn the difference between a market order and a limit order, and why a trader placing a limit order sometimes pays higher fees than a trader placing a market order.
  8. Investing

    Galena Declares 1-for-20 Reverse Split (GALE)

    Galena’s 1-for-20 reverse stock split goes ex-today, which will bump the share price by a factor of 20.
  9. Investing

    Facebook Bug Affected 800,000 Users

    A Facebook bug, now fixed, allowed blocked users to start conversations and access certain features.
RELATED FAQS
  1. Understand the What and Why of Stock Splits

    A stock split is when a company increases the number of shares issued to current shareholders. Read Answer >>
  2. What Happens To A Stop Order After A Stock Splits?

    A stop order (or stop-loss order) is executed when a security reaches a pre-determined price as a market order. Learn what ... Read Answer >>
  3. How Does a Stock Split Affect Cash Dividends?

    When a company issues a stock split it can affect an upcoming cash dividend. It depends on the time the shares split and ... Read Answer >>
  4. What Is a Split-Adjusted Share Price?

    Comparing split-adjusted share prices properly can help reflect accurate performance. Read Answer >>
Trading Center