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Block trades

A block trade is the agreement between two parties to buy and sell a large amount of financial securities. This often involves a high number of equities, such as shares or bonds. Block trades are performed through a privately negotiated trading system, similar to financial derivatives, such as futures and options.

Due to the large amount of securities being bought and sold in a block trade, this trading method is usually reserved for institutional investors. These investors can block trade stock and bonds through a private intermediary, such as an investment bank or hedge fund. Block trades can be bought and sold and subsequently separated into smaller transactions through a number of these intermediaries, for the purpose of ease and a quicker contract.

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What is a block trade?

The term ‘block trade’ refers to the nature of a large order transaction. Block trades are usually carried out through a blockhouse, which is a financial intermediary that aims to help investors with their risk management. Block trading can be seen as a way for traders to buy and sell a high volume of securities without the market prices having a negative impact. Therefore, specially trained staff at blockhouses can help to manage large trade orders of a particular security, while maintaining the price of the security. This way, investors can block trade stock and sell their equities at an agreed date in one go, similar to forward trading​. There should therefore be less risk of price movements when using this method.

According to the New York Stock Exchange, a block trade should involve at least 10,000 shares within the stock market or $200,000 worth of bonds within the treasuries market, although this figure is generally a lot higher. These shares do not include penny stocks but rather more established or blue chip companies. Investors tend to trade blocks outside of the open market or a centralised exchange, therefore they are categorised as over-the-counter​ (OTC) products. This helps to stabilise the price of the securities as the open market can often fluctuate in terms of asset value and volume.

Block trade vs cross trade

A cross trade occurs when a broker offsets buy and sell orders from two separate parties for the same assets, without recording the trade on an exchange. If the broker simply matches the two orders without properly reporting the transaction, this can prevent the investor from getting the most out of their trade.

Although a cross trade carries out a similar performance to that of a block trade, it is a questionable method and can be seen as a form of price manipulation​ to some brokers. Therefore, it is not a permitted method to use on many online trading platforms. This explains why investors often choose to consult a blockhouse for block trades, in order to ensure that they are taking advantage of the best prices within the markets. In some cases, a cross trade is permitted when transferring assets between client accounts, as long as the trade is proven to be advantageous to both parties and executed at a fair market price.

What is a block trade in futures trading?

Futures trading is a contractual agreement between two parties that a financial product can be bought and sold for a specific price at a set date in the future. This relates to block trading, which follows a similar process but on a much larger scale. Futures trading belongs to the category of financial derivative products, along with forwards and options.

However, these derivatives usually deal with smaller orders of securities, and expand across wider markets outside of equities, including forex, commodities and indices. A block trade using futures or options results in a very distinguishable contract from any other in the same category.

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Example of a block trade

So, how does a block trade work?

For example, if a hedge fund wants to sell 100,000 shares of a company for $10 each, it can either do this in one transaction or through multiple separate transactions. A blockhouse will pair the buyer and seller, negotiate a trade and carry it out to the fairest conclusion.

Therefore, it may decide to sell all 100,000 shares at once to a single buyer, or it may find 10 buyers to purchase 10,000 shares each. These transactions are all completed at the same time. By using a blockhouse, this intends to keep market volatility low and prevent slippage between trades, as financial securities can often change price suddenly.

Block trading system

As we have discussed, block trades are usually reserved for institutional investors in particular, such as hedge funds, pension funds, insurance providers, investment banks and registered brokers. Visit our institutional page to find out more information on eligibility. By choosing a label plan that is suitable for you, we will provide access to many professional trading tools, including block allocation and technical reports to enhance your experience with block trades.

Familiarise yourself with our award-winning online trading platform, Next Generation, by registering for a live account. You will first get access to a demo account so you can practise with £10,000 worth of virtual funds.

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Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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