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A block trade is a permissible, noncompetitive, privately negotiated transaction either at or exceeding an exchange determined minimum threshold quantity of shareswhich is executed apart and away from the open outcry or electronic markets.
For instance, a hedge fund holds a large position in Company X and would like to sell it completely. If this were put into the market as a large sell order, the price would sharply drop—by definition, the stake was large enough to affect supply and demand causing a market impact.
Instead, the fund may arrange for a block trade with another company through an investment bankbenefiting both parties: Unlike large public offerings, for which it often takes months to prepare the necessary documentation, block trades are usually carried out at short notice and closed quickly.
For a variety of reasons, block trades can be more difficult than other trades and often expose the broker-dealer to more risk. Most notably, because the broker-dealer is committing to a price for a large amount of securities, any adverse market movement can saddle the broker-dealer with a large loss if the position has not been sold.
As such, engaging in block trading can tie up a broker-dealer's capital. Further, the fact that a large, well-informed money manager wants to sell or perhaps buy a large position in a particular security may connote future price movements i. Block trading is a useful measure for analysts in order to assess where institutional investors are pricing a stock. Because in a merger or acquisition, a bid needs to "clear the market" i.
These prices imply what the largest shareholders are willing to sell their shares for; therefore, in block trading analysis, small trades are ignored to avoid skewing the data. From Wikipedia, the free encyclopedia.
Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock. Authorised capital Issued shares Shares outstanding Treasury stock.
Electronic communication network List of stock a block trade consists of how many shares are in an option Trading hours Multilateral trading facility Over-the-counter. Alpha Arbitrage pricing theory Beta Bid—ask a block trade consists of how many shares are in an option Book value Capital asset pricing model Capital market line Dividend discount model Dividend yield Earnings per share Earnings yield Net asset value Security characteristic line Security market line T-model.
Algorithmic trading Buy and hold Contrarian investing Day trading Dollar cost averaging Efficient-market hypothesis Fundamental analysis Growth stock Market timing Modern portfolio theory Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory Random walk hypothesis Sector rotation Style investing Swing trading Technical analysis Trend following Value investing.