What is Block Trading?

Block trading generally refers to large-volume transactions in the markets. These transactions are typically preferred by large investment funds, institutional investors, and high-net-worth individuals, allowing them to execute large quantities of securities without negatively impacting the market.

Block trading often involves the buying or selling of hundreds of thousands or even millions of shares or bonds in a single transaction. To prevent price fluctuations, these large-scale trades are conducted on special platforms or over-the-counter (OTC) markets, where they can be executed more discreetly.

This type of trading aims to increase liquidity and reduce transaction costs. In such trades, brokers or intermediaries often play a role by helping balance the market, ensuring that buyers and sellers can conduct transactions without causing important market disruptions.

In our article, you can find more information about block trades.

Understanding Block Trade

A block trade typically occurs in much larger volumes than standard market transactions, which is why it has the potential to cause price fluctuations in the market. 

These large-scale transactions are usually conducted by institutional investors such as hedge funds, pension funds, and insurance companies. These investors prefer block trading to maintain liquidity and reduce transaction costs, and the trade is typically executed in OTC markets.

Due to the size of the trade, both the buyer and the seller usually engage in private negotiations. In many cases, a small discount is offered to the buyer as part of the deal. This way, both parties benefit—the seller can offload a large position without causing a drop in the stock price, while the buyer secures a better deal compared to the open market.

Difference Between Block Trades and Regular Trades

Block trades involve the purchase or sale of large quantities of securities in a single transaction, whereas regular trades are executed in smaller amounts, suitable for the daily trading volume of the market. 

Additionally, block trades are typically conducted over-the-counter (OTC), while regular trades take place on exchanges. Due to the potential impact large block trades can have on market prices, they are carefully planned and executed to minimize any negative effect on the market.

How Block Trades Work?

Block trading transactions involve the buying and selling of large volumes of securities, setting them apart from standard trades in the market. These transactions typically occur between institutional investors and are negotiated directly between the buyer and the seller.

Due to the complexity of block trading, the process requires the involvement of multiple parties. Below, you can find more details on how block trading transactions work:

Identifying Buyers and Sellers

Block trading transactions are typically conducted by institutional investors, such as large investment funds, insurance companies, and hedge funds. During the process of identifying buyers and sellers, parties holding large positions who are looking to either offload or acquire these positions are identified.

Negotiating the Terms

The buyer and seller negotiate the volume, price, and other terms of the block trade. These negotiations are typically conducted in a way that avoids impact on the market price due to the large transaction size. Additionally, discounts may often be applied.

Settlement Procedures

Block trades typically occur in over-the-counter (OTC) markets and are subject to specific settlement procedures. Due to the size of the transaction, the settlement and payment processes require special attention.

The Role of Intermediaries

In block trades, intermediaries such as brokers and brokerage firms play an importat role. They facilitate the transaction between the two parties, help maintain liquidity, and ensure that the trades are completed smoothly.

How Block Trades Are Done?

Block trading transactions are typically conducted using different methods than standard market trades due to their large volumes. These transactions are carried out using special techniques to minimize market fluctuations and reduce transaction costs.

Below are the main methods of how block trades are executed:

• Dark Pools: A significant number of block trades are carried out through dark pools, which are platforms where liquidity is maintained but the trades are not directly visible in the market. These platforms keep large-scale transactions confidential to avoid price fluctuations.
• Breaking Up Orders: Sometimes block trades are divided into smaller orders rather than being executed all at once. This method helps minimize sudden price reactions in the market and reduces transaction costs.
• Iceberg Orders: Iceberg orders allow only a small portion of a large transaction to be visible in the market at a time. This way, large trades are executed piece by piece, concealing their full impact on the market.
• Direct Negotiation: Buyers and sellers can directly negotiate block trades with the help of intermediaries. In this case, the price, transaction conditions, and volume are agreed upon outside the market and the transaction is carried out at the negotiated price.

Block Trade Example

Block trades are often important market events. A well-known example of this is Morgan Stanley's sale of SoftBank's Alibaba shares.

In this transaction, Morgan Stanley facilitated the sale of a large portion of Alibaba shares owned by the Japanese tech giant SoftBank through block trading. The size of the transaction was approximately $12 billion, which made waves in global markets. The block trade was carried out through special platforms managed by Morgan Stanley to prevent major price fluctuations in the market.

This trade is a great example of how large-scale stock sales can be executed without causing sudden price movements in the market. Thanks to the block trading strategy, SoftBank was able to liquidate a major position, while investors took advantage of the deal without creating pressure on the market.

Impact of Block Trades on the Market

The impact of block trades on the market can be significant, especially when the trading volume is high and large institutional investors are buying or selling shares:

• Block trades can increase market liquidity, as these large-volume transactions bring buyers and sellers together.
• Large transactions may cause sudden price fluctuations in the market. However, since block trades are often conducted on private platforms, these fluctuations are minimized.
• Block trades can temporarily alter the balance of supply and demand in the market. For instance, in the case of a large stock sale, the increase in supply can drive the stock price down.
• When a large institutional investor buys or sells a particular stock, it can affect the market sentiment. For example, a major sale may create a negative perception among investors.
• Brokers and intermediaries play a key role in ensuring the market remains stable and the trade is executed smoothly.

Benefits of Block Trading

• Block trading allows large volumes of securities to be bought and sold without affecting market prices.
• It is usually conducted on private platforms or in the OTC market, minimizing sudden price fluctuations.
• When high-volume trades are executed together, commission and transaction costs can be lower.
• Large-scale transactions are often carried out through dark pools. They ensure the confidentiality of the trades since they're not visible to the market.
• Since they are completed in a single transaction, the process is faster, saving time.
• Block trading enables large investors to buy or sell an amount of shares at once, thus reducing selling pressure on the market.

Risks of Block Trading

• Block trades can lead to sudden price fluctuations. Particularly in markets with low liquidity, large-volume trades can have unexpected effects on the price.
• Keeping the transaction confidential may be challenging. Even with the use of dark pools or private platforms, news of a large trade can leak and affect market sentiment.
• During block trades, finding a buyer or seller can be difficult. It can be especially hard to find a counterparty for large transactions.
• Due to a lack of liquidity, transactions may not be executed at the desired prices, which can increase transaction costs.
• Brokers or intermediaries may not always maintain impartiality during the transaction, potentially leading to conflicts of interest.

More About Block Trading

Can block traders affect stock prices?

Yes, block trades can affect stock prices, especially because they involve large volumes. In markets with low liquidity, a large block trade can shift the supply-demand balance, leading to sudden price fluctuations in the stock. However, to minimize this impact, block trades are often executed in over-the-counter (OTC) markets or on dark pool platforms where the transaction is less visible to the public market.

How do iceberg orders protect liquidity?

Iceberg orders protect liquidity by only revealing a small portion of a large trade to the market at any given time. This allows the transaction to be carried out in smaller parts, helping to avoid sudden price movements and maintaining liquidity. The investor keeps the bulk of the transaction hidden, controlling the market's reaction.

What are the market manipulation risks in block trades?

Block trades, especially when conducted off-market, carry market manipulation risks. For example, it is possible to manipulate prices by pushing them up or down through block trades. These large transactions can also impact market sentiment among smaller investors, leading to speculation. Furthermore, information leakage about block trades can increase the risk of insider trading.

Why are block trades usually conducted in OTC markets?

Block trades are generally conducted in over-the-counter (OTC) markets because their large volume has the potential to cause sudden price swings in the public market. OTC platforms allow large trades to be executed without directly impacting market prices, preserving liquidity and reducing transaction costs.

What is the broker's role in block trades?

In block trades, brokers act as intermediaries between buyers and sellers. They facilitate large transactions, maintain liquidity, balance prices, and ensure the transaction is executed smoothly. Brokers often organize block trades outside the public market, helping to reduce transaction costs and assisting with negotiations between the two parties.

How are block trades used in commodity markets?

Block trades are also widely used in commodity markets. Large investors or institutional players often use block trades to buy or sell huge amounts of commodities like oil, gold, or silver. These trades allow for large volumes of commodities to be transacted without causing sudden price movements, maintaining market liquidity.