A block trade is the purchase or sale of a large number of securities (at least 10,000 shares in the case of stock) as a single transaction that is negotiated as opposed to traded. The price is arranged between parties and sometimes it’s outside of the visibility of the open market to prevent a drastic drop in the stock price.
Individuals don’t really make block trades because of the sheer scale of them. Most often they occur when hedge funds and institutional investors buy and sell bonds and shares via investment banks or another intermediary source.
Because it’s such a huge trade, a block trade can impact the value of the bonds or shares being purchased.
Know who usually makes block trades? Block houses. That makes it easy to remember. These guys are the pros. They know how to execute block trades so that the stock prices don’t fall too far too fast.
Block trades can be tricky because they expose you to risk. The stock is sold for one price per share, which means it’s a big commitment to make if something crazy happens in the market while the trade is being executed.
Here’s an example:
Say a hedge fund wants to sell off its stake in a company entirely – and it’s a large chunk. They want out of the game and fast. However, if they put all their shares up for sale on the market, they could cause the price to suddenly drop because the stake is so large. Instead, the hedge fund probably wants to do a block trade with another company instead through our friend the block houses. This actually makes sense for both the buyer and the seller because the seller gets a better price price and the purchaser can negotiate to get a discount on market rates. Block trades don’t waste any time either – they usually happen without much notice and close fast.
This block trade is going to be the talk of the town once it goes down.