Key Takeaways

● A block trade is a large, privately negotiated securities transaction.

● A block trade is executed outside of the open markets.

● Generally speaking, a block trade would offer the buyer a discount to the market price.

Understand a block trade

A block trade is a bulk-sized, privately negotiated securities transaction.

To avoid negative impact on the securities' market prices, block trades are executed outside of the open markets.

"Block trading" services — also known as "upstairs trading desks" — are offered to institutional investors by broker-dealers.

A block trade is defined by the New York Stock Exchange and the Nasdaq as a trade of at least 10,000 shares or worth more than $200,000.

Other shareholders usually would not be informed of the transaction until it's been publicly released.

The privately negotiated prices among institutional investors in block trading can serve as valuable reference for analysts or individual investors to evaluate the stock prices. This information has value because block trading prices imply what price those larger shareholders are willing to accept, and avoids data skewing by ignoring small trades.

Example of a block trade

For instance, imagine that hedge fund Y holds 100,000 shares of Company X and wants to sell all of them at the current market price of $13. Company X now has a relatively small market cap of nearly $8 million. The transaction will likely push down the price significantly if hedge fund Y pends a selling order on the open market because the amount is large enough to affect the supply and demand of Company X stock and then push the price down sharply.

To avoid this, hedge fund Y could arrange for a block trade with another institutional investor willing to buy all 100,000 shares via an intermediary.

Generally speaking, block trading could benefit both parties: the selling fund gets a more attractive purchase price, while the purchasing company can negotiate a discount off the market rates.