What it means
The reason blocks are handled separately is market impact. An order representing several days of normal trading volume will exhaust the visible buyers at the current price and keep filling at progressively worse ones, so the average price achieved ends up well below the quoted price the seller saw.
Block desks solve this by finding a counterparty away from the public order book. The broker either matches a natural buyer and seller directly, in what is called a cross, or commits its own capital by buying the block outright at a discount and working out of the position over time.
Pricing is where the negotiation happens. The block is usually agreed at a discount to the prevailing market price, commonly a fraction of a percent to a few percent depending on the size relative to average daily volume, the liquidity of the stock and how urgently the seller wants out.
Blocks are also executed through alternative venues designed for size, where large orders can rest without displaying their full quantity. Whatever the venue, the trade must be reported, so the market eventually sees a large print and draws its own conclusions about who was buying or selling.
One point of confusion is worth clearing up. The word is also used loosely to describe a large parcel of shares held by one owner, as in a founder's block of stock, which is about ownership concentration rather than a trade.
Context normally makes clear which sense is meant.
In practice
Real-world examples.
Example
A pension fund exiting a mid-cap holding worth $20,000,000 asks three block desks for a price rather than sending the order to the exchange. It takes the best bid, accepting a small discount in exchange for certainty and immediate completion.
Example
A founder whose lock-up has expired sells 2,000,000 shares through a single negotiated block to a group of institutional buyers. Handling it as one block avoids weeks of visible selling pressure that would have depressed the share price.
Example
An index fund must sell a company being removed from its benchmark at the quarterly rebalance. It arranges a block with a market maker priced off the closing auction, so its tracking error against the index stays minimal.
Formula
Calculation
Two figures matter to the seller: Block proceeds = shares x block price, and Discount cost = shares x (market price - block price). Suppose a pension fund needs to sell 400,000 shares of a mid-cap company trading at $50.00, a position worth 400,000 x $50.00 = $20,000,000 at the screen price. The stock trades about 250,000 shares a day, so this order is more than one and a half days of volume, and working it through the market would move the price. The block desk offers to take the whole position at $49.40, a discount of $50.00 - $49.40 = $0.60 per share, which is $0.60 / $50.00 = 1.2%. Proceeds are 400,000 x $49.40 = $19,760,000, and the discount cost is 400,000 x $0.60 = $240,000. The fund accepts because its own modelling suggested that dribbling the order into the market over three days would have cost closer to 2%, or 400,000 x $50.00 x 0.02 = $400,000, plus three days of price risk.Case study
Seen in the real world.
Merrow Capital is a fictional asset manager created for this illustration. It decided to exit a $32,000,000 position in a listed speciality chemicals company that traded roughly $4,000,000 of stock a day.
The trading desk first tried working the order through an algorithm over a week. By day three the share price had fallen 4% on visible selling pressure, other participants had guessed a large seller was present, and Merrow had sold less than a third of the position.
In this illustrative account the desk stopped, took the remaining stock to a block desk and completed the sale in one negotiated trade at a 1.5% discount to the prevailing price. The head of trading noted afterwards that the discount that had looked expensive on day one was considerably cheaper than the price damage caused by trying to avoid it.
Watch out
Common mistakes.
- Comparing the block price with the screen price and calling the difference a loss, without asking what the average price would have been if the order had been worked in the open market.
- Assuming block trades are secret. They are privately negotiated but publicly reported, so the size and price become visible shortly after execution.
- Judging block size only in shares. What matters is the order relative to average daily volume, so 50,000 shares can be a routine trade in one stock and a serious block in another.
Questions
People also ask.
What counts as a block trade?
Conventionally at least 10,000 shares or around $200,000 of market value, though in practice traders judge it by the order's size relative to typical daily volume.
Why does a block trade at a discount?
The buyer is taking on the risk and cost of holding or redistributing a large position, and the discount is the compensation for that service.
Does a block trade always need a broker?
Almost always in practice, because the broker's network of institutional clients is what allows a counterparty to be found without advertising the order to the whole market.
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