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Block Trading Definition & Examples

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Last editedAug 20212 min read

Many small business owners are also keen investors. Their understanding and perspective of the markets lends itself well to negotiating the intricacies of trading. As does their penchant for agile decision-making. But the world of investing can be bamboozling to newcomers. There’s a lot of complex terminology to wrap your head around. Concepts like block trading, for instance, may elude entrepreneur investors. But through digital trading platforms even new investors can access the same trading tools as institutional investors (if they meet certain criteria). 

In any event, an understanding of block trading can round out your understanding as an entrepreneur investor.

What is a block trade?

A block trade is the buying and selling of large volumes of securities. It’s a way for traders to carry out bilateral exchanges of securities without market prices having a negative impact. These trades typically take place away from exchanges in order to avoid outlier price points and their potential, albeit temporary, effect on the price of a given security. 

According to the Stock Exchange, a block trade should involve at least 10,000 shares within the stock market. In practice, however, block trades are often significantly larger than this and individual investors rarely make block trades due to their prohibitive size. 

However, keeping an eye on block trade activities, even though you can’t participate in them, can help you to stay ahead of the curve as an investor and track the trajectories of certain markets.

How are block trades made?

Block trades are typically conducted through block trading facilities known as blockhouses. These are intermediary third-party firms that specialise in facilitating large trades in ways that don’t accidentally trigger fluctuations in security prices.

Blockhouses have a staff of traders who are accustomed to managing such large trades. The benefit of going through a blockhouse is that their staffers have good relationships with other traders and brokerage firms, greasing the wheels of potentially large and unwieldy transactions. The size of the transaction lots can vary enormously. However, blockhouses are generally not permitted to aggregate multiple separate orders in order to bring them up to the 10,000 share minimum requirement.

When institutional investors decide to initiate a block trade, they rely on blockhouse staffers to help them obtain the best possible deal for them. Because the trades are not visible to the public, they are insulated from large market fluctuations. Of course, that’s not to say that block trades can’t affect the markets. Their often colossal size necessitates careful handling, which is why investors are glad of the expert touch that blockhouses provide. 

Block trading example

Like many financial concepts, block trading can be tricky to grasp. Let’s clarify it with an illustrative example. 

Let’s say a hedge fund in the city wants to sell 100,000 shares of a small-cap company, with a market price of £10 per share. This is a million-pound transaction. But the company itself may only be worth a couple of hundred million. Thus, if the sale were entered as a single market order, the price of the shares could plummet. Furthermore, the sheer size of the order means that the hedge fund would see slippage on the order, and prices would get progressively worse as market-making took place. This would likely be exacerbated by other market participants piling on short as the price declines, thereby forcing the stock’s value down further.

The hedge fund can avoid this by getting in touch with a blockhouse to carry out a block trade. The blockhouse’s team can break up this million-pound trade into smaller, more manageable transactions. The 100,000 shares might be broken down into 50 smaller blocks of 2,000, each at £10 per share. To limit market volatility, each of the blocks would be traded through a separate broker. 

In some circumstances, a broker may be able to find a buyer who’s willing to take on all of the shares through an agreement that’s arranged outside of the open market.  

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If you’re interested in finding out more about block trading, investment, or any other aspect of finances then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments

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