What are block trades?

byMunyaradzi Mafaro published on

Block trades are really big trades of stocks or bonds. They are much bigger than normal trades that regular people make. A block trade has to be at least 10,000 shares of stock. That’s a lot! Sometimes the cut-off is even higher, like 20,000 shares.

Banks and big financial companies are the ones who do block trades. They are the only ones with enough money to buy that many shares at once. Regular people and smaller companies can’t do block trades. The banks have special desks with people whose job is just to handle these huge trades.

Why do block trades happen?

There are a few main reasons why block trades happen:

  1. A big investor wants to sell a lot of stock they own all at once. Maybe they need the cash or they think the stock price will go down soon. So they work with a bank to sell it all off in one big block.
  2. A company is doing a big deal, like buying another company. To pay for it, they need to sell a bunch of stock quick to raise money. So they’ll do a block trade.
  3. Sometimes it’s about balancing out risk. Like if a big bank realizes they own too much of one stock. They might use a block trade to reduce how much they own so they’re not as exposed if that stock tanks.

How block trades work

Here’s the deal with how block trades go down:

First, the bank or financial institution doing the block trade has to put up a lot of their own cash to buy all those shares. We’re talking millions or even billions of dollars sometimes. That’s the only way they can buy such a huge amount at once.

They get a discount on the shares though. Because they’re buying so much, they don’t have to pay the normal market price that you or I would pay for just a few shares. The seller gives them a deal since they’re taking all the shares off their hands in one shot.

The bank’s risk

Doing a block trade is risky business for the banks though. Once they buy all those shares at a discount, they then have to turn around and sell them to other investors. The goal is to sell the shares for more than they paid. That’s how they make money.

But it doesn’t always work out that way. The bank could get stuck holding shares that nobody wants to buy. Or they might have to sell them for less than they paid. If the price drops too much before they can sell, the bank can lose a boatload of money. So block trades aren’t something banks do willy-nilly.

Block trades happen fast and quiet

Another key thing about block trades is they happen really fast, usually in a matter of minutes or hours. The banks want to flip the shares and get them sold to other buyers ASAP. The longer they hold them, the more risk they’re taking on that the price will change in a bad way.

Block trades also often happen quietly, not out in the open market. The banks work their contacts and connections to line up buyers among big investment funds, pensions, endowments, and high net worth people. They want to avoid spooking the market. A huge sale of shares hitting the open market all at once could tank the stock price.

The role of dark pools

A lot of block trades happen in what are called “dark pools.” These are private exchanges run by the big banks and financial firms. What happens in the dark pools is hidden from the public and the open market. It lets the banks trade big blocks of shares without tipping their hand to everyone else.

Dark pools have gotten kind of a shady reputation though. A lot of people think sneaky stuff happens in them, like big players trading on inside information. The regulators have cracked down on dark pools in recent years. They now have to report their activity more than they used to.

Pros and cons of block trades

There’s some good and bad that comes with block trades. Here are the main points:

The good

  • They provide a way for big investors to move a lot of shares fast without making the price go crazy
  • Companies can use them to raise a bunch of money quick for big deals
  • The banks can make fat profits if the trades go well

The bad

  • The banks take on a lot of risk. One bad block trade can cost them a fortune.
  • Some people think they make the market unfair. Big players can trade in ways regular folks can’t.
  • When block trades happen in dark pools, there’s not a lot of transparency about what’s going on
Munyaradzi Mafaro

Munyaradzi Mafaro is a music enthusiast and he also likes to tackle topics of business, productivity, and the possibilities for growth in the digital world.