A block trade is a large transaction of securities negotiated privately outside of open public markets to lessen the impact on the price of the security.
Mechanics and reporting of block trades
Institutional investors use block trades when they need to buy or sell massive quantities of equities or fixed-income securities. When a fund places a standard order of this size on a public exchange, the sudden shift in supply or demand alters the market price. A large sell order depresses the price, while a large buy order drives it up. Block trades occur off the exchange floor to prevent this price slippage.
Financial intermediaries known as blockhouses facilitate these transactions. Staff at a blockhouse match the buyer and the seller privately. They agree on a specific price for the entire block of shares or bonds. These trades also take place in dark pools, which are private exchanges for trading securities that do not broadcast order data prior to execution.
The specific threshold for what qualifies as a block trade depends on the jurisdiction. In the United States and Canada, regulatory bodies generally define a block trade as an order of at least 10,000 shares or a total market value of at least $200,000. In European markets governed by MiFID II regulations, the thresholds for large-in-scale orders vary based on the average daily turnover of the specific financial instrument. Regardless of the region, participants must report the completed trade to the relevant exchange or regulatory authority so the volume and price are eventually published to the broader market.
Example
Consider a scenario where you and your fellow Elephants manage an institutional fund called Elephant Capital. The fund holds two million shares in a global logistics firm and wants to liquidate the position. If Elephant Capital offloads two million shares directly onto the open order book of the Tokyo Stock Exchange, the excess supply will immediately lower the share price. The final shares sold will fetch a much lower price than the first shares sold.
To avoid this, Elephant Capital contacts a blockhouse broker. The broker privately locates a pension fund looking to acquire a large stake in the logistics firm. The two parties negotiate a block trade at a flat rate of 500 yen per share. The transaction is completed off the public exchange. The trade is then reported to the exchange tape. Elephant Capital sells its entire position at a predictable price, and the broader market avoids the immediate volatility of a massive open-market sell order.