What Is a Block Trade?

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DEFINITION
Block trades are large transactions of securities like shares of stock, options contracts, or bonds. Typically carried out by institutional investors, block trades refer to trades that meet certain transaction dollar values or number of shares.

Block trades are large transactions of securities like shares of stock, options contracts, or bonds. Typically carried out by institutional investors, block trades refer to trades that meet certain transaction dollar values or number of shares.

Block trades are common, and while they rarely cause major moves in markets, they can have an impact on prices of specific securities.  

Definition and Example of a Block Trade

Block trades are transactions involving large quantities of a security. The New York Stock Exchange (NYSE) defines a block trade as a transaction order that’s at least 10,000 shares or has a market value of $200,000 or more.

For example, a $120,000 order for 10,000 shares of stock at $12 per share, and a $200,000 order for 2000 shares at $100 per share are both considered block trades. In practice, most block trades could be of much larger value. 

Block trades are used by institutional investors like mutual funds, insurance companies, and banks to buy or sell large quantities of securities that may get better pricing and reduce trading expenses. Advisory firms that manage individual portfolios use block trades instead of separate smaller transactions for each client account. Corporate insiders may use block trades to buy or sell their holdings.

Block trades are privately negotiated by wholesalers, or block houses. Block houses are brokerages that specialize in block trading.

With these negotiations, the investor may avoid additional fees and potentially unfavorable changes in price.

How a Block Trade Works

When an institutional investor has a large block transaction they can reach out to a block house where a block house trader may break up a block trade into multiple pieces, arrange for a direct transaction with a single buyer, or purchase all or part of the block themselves. Block trades are executed between buyers and sellers outside of the national exchanges because of their size. That sometimes is also referred to as trading in the "upstairs market."

National exchanges such as the NYSE or Nasdaq are "auction markets," where orders are placed, posted, and bid on. Large buy or sell orders placed on a national exchange can significantly impact the price up or down before the order gets filled. 

Block trades are public just like trades on the national exchanges, but they are not auctions. A block trade is posted in the public domain after it is completed. It is not affected by the auction process.

Institutions can also use an alternative trading system or a "dark pool" for block trades. Dark pools are anonymous markets for direct negotiated trades between buyers and sellers. Dark pools can be sponsored by investment banks and broker-dealers for their own clients, national exchanges, or independent electronic markets. 

Block trades of stocks and bonds are regulated by the Securities and Exchange Commission. Block trades of commodities, futures, and options are regulated by the Commodities Futures Trading Commission.

Types of Block Trades

Buy Side Block Trade

The "buy side" of the financial markets are organizations that have money to invest on behalf of their clients. Mutual funds, pensions, hedge funds, and insurance companies are "buy side." The buy side routinely purchases and sells large blocks of securities, often using alternative trading systems. 

Sell Side Block Trade

The sell side of the financial markets are firms that create and sell securities to the buy side. Investment banks and advisory firms are on the sell side. Bought deals or accelerated book builds are sell side block trades. The investment bank may purchase the entire block from the seller, and then resell it to buy side clients. Bought deals are often used to sell the holdings of affiliated shareholders, or a new securities issue under a company’s shelf filing with the SEC.

What Block Trades Mean for Individual Investors

Individual investors rarely use block trades, but they can affect their portfolios. Research suggests that the size of the transaction and nature of the block transaction (buy or sell) determines whether the temporary price impact on the stock in the general market would be positive or negative. Also, given that a word of the block transaction is put out by block houses, any information leaks could also affect stock prices before the block transaction gets completed.

Block trades may have some lasting impact on the price of a stock. Research suggests that the permanent price impact of a buy block trade is larger than that of a seller-initiated block transaction. Historical prices of the stock also play a role in whether the price impact of a block trade is fleeting or lasts longer. Also, a block trade could have a permanent price impact if the stock does not have close enough substitutes, which means the demand-supply forces may not function as perfectly as expected.

Individual investors may follow block trades as a way to gauge institutional views on a stock, but that may not necessarily result in a profitable trade.

Some brokerages may offer online tools to scan the markets for block trades. While there is some research to suggest that mimicking large corporate insider trades may be profitable for some investors, there are also a number of studies that suggest the opposite.

Key Takeaways

  • Block trades are large transactions of securities like stocks, bonds, options, and futures by institutional investors.
  • Block trades may impact the portfolios of the average investor, sometimes significantly
  • Block trades are privately negotiated outside of the national exchanges
  • Institutional investors use block houses and dark pools for block trades to avoid price movements on national exchanges like the NYSE and Nasdaq.

Article Sources

  1. New York Stock Exchange.”NYSE Guide, Regulation, Rule 0, New York Stock Exchange, Regulation of the Exchange and Its Member Organizations,” Page 284. Accessed Jan. 27, 2022.

  2. R. Stafford Johnson. “Equity Markets and Portfolio Analysis,” Page 159. John Wiley & Sons, Inc. 2014. Accessed Jan. 27, 2022.

  3. Donald B. Keim and Ananth Madhavan. “The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects,” Page 32, via University of Nevada, Reno. Accessed Jan.27, 2022.

  4. Gideon Saar. “Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation,” Accessed Jan. 27, 2022.

  5. Carr Bettis, Don Vickrey, and Donn W. Vickrey. “Mimickers of Corporate Insiders Who Make Large-Volume Trades.” Accessed Jan. 27, 2022.