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What Is a Block Trade?

By Colin Dodds · August 17, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is a Block Trade?

A block trade is a single purchase or sale of a large volume of financial assets. Just how many shares are in a block trade deal? A block, as defined by the New York Stock Exchange’s Rule 127.10, is a minimum of 10,000 shares of stock. For bonds and penny stocks, a block trade usually involves at least $200,000 worth of a given fixed-income security.

Typically though, the number of shares in a block trade is far higher. Individuals typically don’t execute block trades. Rather, they most often come from institutional investors, such as mutual funds, hedge funds or other large-scale investors.

Why Block Trades Exist

These trades are often so large that they can move the market in a given security. If a pension fund manager, for example, plans to sell a million shares of a particular stock without sparking a broader market selloff, selling all those shares on a public market will take time.

During that time, the price of the shares the manager is selling will go down, simply as a result of the sale that they are making. Sometimes, the manager will sell even more slowly. But that creates the risk that other traders will identify the institution or the fund who’s selling. Then those investors might short the stock to take advantage of the manager’s selling.

Those same risks exist for a fund manager who is buying large blocks of a given security on a public market. The purchase itself can drive up the price. And if the trade attracts attention, other traders may front-run the manager’s purchases.

How Block Trades Are Executed

That’s why many large institutions conduct their block trades through block trade facilities, dark pools, or blockhouses. They all have expertise in both initiating and executing very large trades, without making a
major – and costly – impact on the price of a given stock or bond.

Every one of these non-public exchange services operates according to its own rules, but what they have in common is that they have a set of relationships with hedge funds and other large traders who can buy and sell large blocks of securities. By connecting these large buyers and sellers, blockhouses and dark pools offer the ability to make sometimes enormous trades without roiling the markets.

Investment banks and large brokerages often have a division known as a block house, which runs dark pools, which get their name because the public can’t see the trades until at least a day after they’ve been executed. Dark pools have been growing in popularity. In 2020, there were more than 50 dark pools registered with the Securities and Exchange Commission (SEC) in the United States. In June 2021, dark pools executed about 13% of all US equity trades, according to an analysis by Rosenblatt Securities.

Smaller Trades Are Used to Hide Block Trades

To help institutional traders conceal their block trades, blockhouses use a series of maneuvers to conceal the size of the trade being executed. At their most basic, these strategies involve breaking up the block into smaller trades. But they can be quite sophisticated, such as “iceberg orders,” in which the blockhouse will break block orders into a large number of limit orders.

By using an automated program to make the smaller limit orders, they can hide the actual number of orders at any given time. That’s where the “iceberg” in the name comes from, given that the limit orders that other traders can see are just the “tip of the iceberg.”

Taken together, these networks of traders who make block trades are often referred to as the “Upstairs Market,” because their trades occur off the trading floor.

Are Block Trades Good or Bad?

Neither. While they can move markets, block trades are not market manipulation. They’re simply a method used by large investors to adjust their asset allocation with the least market disruption and stock volatility possible.

Recommended: How Much Market Fluctuation is Normal?

However, institutional investors wouldn’t go to such lengths to conceal their block trades unless the information offered by a block trade was valuable. A block trade can offer clues about the short-term future movement and liquidity of a given security. Or it can indicate that market sentiment is shifting.

However, sometimes it’s hard to know what a block trade indicates. A large trade that looks like the tuning of the tide for a popular stock may just be a giant mutual fund making a minor adjustment.

So how can retail investors find information about block trades, and profit from it? There are a host of digital tools, some offered by mainstream online brokerages, that function like block trade indicators.

Many of these tools use Nasdaq Quotation Dissemination Service (NQDS), Level 2 – usually just called
Level 2 – data. This subscription service offers investors access to the NASDAQ order book in real time. Its data feed includes price quotes from the market makers who are registered to trade every NASDAQ and OTC Bulletin Board security, and is popular among investors who trade using market depth and market momentum.

Recommended: Using Technical Analysis to Research Stocks

Some blockhouses design their strategies, such as “iceberg orders,” to make them hard to detect on Level 2. But when combined with software filters, investors have a better chance of glimpsing these major trades before they show up later on the consolidated tape, which records all trades through blockhouses and dark pools – though often well after those trades have been fully executed.

These software tools vary widely in both sophistication and cost, but may be worth considering, especially for momentum investors, who buy securities that have been trending upwards, and sell ones that have begun to decline.

At the very least, using software to scan for block trades is a way to keep track of what large institutional investors and fund managers are buying and selling. Active traders may use the information to spot new trends.

Recommended: Day Trading Strategies: How to Day Trade

The Takeaway

It can be difficult for individual investors to detect block trades–giant position shifts by institutional investors–on their own. But these trades have some benefits for individual investors. The mutual funds and exchange-traded funds (ETFs) that most investors have in their brokerage accounts, IRAs, 401(k)s and 529 plans take advantage of the lower trading costs and volatility-dampening benefits of block trades every day, and pass along those advantages to their shareholders.

An easy way to start building a portfolio of exchange-trade funds and other investments like stocks and cryptocurrency is via the SoFi Invest® brokerage app. You can pick your own investments or use SoFi Invest’s automated investing solution that invests your money for you based on your goals and risk, without charging a management fee.

Photo credit: iStock/marchmeena29


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