Block trade
Encyclopedia
A block trade is a permissible, noncompetitive, privately negotiated transaction either at or exceeding an exchange determined minimum threshold quantity of shares, which is executed apart and away from the open outcry
or electronic markets. In the United States and Canada a block trade is usually at least 10,000 shares of a stock or $200,000 of bonds but in practice significantly larger.
For instance, a hedge fund
holds a large position in Company X and would like to sell it completely. If this were put into the market as a large sell order, the price would sharply drop—by definition, the stake was large enough to affect supply and demand. Instead, the fund may arrange for a block trade with another company through an investment bank, benefiting both parties: the selling fund gets a more attractive purchase price, while the purchasing company can negotiate a discount off the market rates. Unlike large public offerings, for which it often takes months to prepare the necessary documentation, block trades are usually carried out at short notice and closed quickly.
Block trading is a useful measure for analysts in order to assess where institutional investor
s are pricing a stock. Because in a merger or acquisition, a bid needs to "clear the market" (i.e. enough shareholders need to tender), it is most useful to see at what prices large blocks of stock are trading. These prices imply what the largest shareholders are willing to sell their shares for; therefore, in block trading analysis, small trades are ignored to avoid skewing the data.
Open outcry
Open outcry is the name of a method of communication between professionals on a stock exchange or futures exchange. It involves shouting and the use of hand signals to transfer information primarily about buy and sell orders...
or electronic markets. In the United States and Canada a block trade is usually at least 10,000 shares of a stock or $200,000 of bonds but in practice significantly larger.
For instance, a hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
holds a large position in Company X and would like to sell it completely. If this were put into the market as a large sell order, the price would sharply drop—by definition, the stake was large enough to affect supply and demand. Instead, the fund may arrange for a block trade with another company through an investment bank, benefiting both parties: the selling fund gets a more attractive purchase price, while the purchasing company can negotiate a discount off the market rates. Unlike large public offerings, for which it often takes months to prepare the necessary documentation, block trades are usually carried out at short notice and closed quickly.
Block trading is a useful measure for analysts in order to assess where institutional investor
Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
s are pricing a stock. Because in a merger or acquisition, a bid needs to "clear the market" (i.e. enough shareholders need to tender), it is most useful to see at what prices large blocks of stock are trading. These prices imply what the largest shareholders are willing to sell their shares for; therefore, in block trading analysis, small trades are ignored to avoid skewing the data.