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What Are Block Trades (SEC Definition)?


The stock market is a system that’s balanced by the law of supply and demand. That means prices fall when a stock’s supply outpaces demand, and prices climb when demand outpaces supply. 

With that in mind, you can imagine how much a large purchase or sale of shares in a single order has the potential to move market prices. That’s why market makers, hedge funds, and institutional investors like mutual funds, pension funds, and exchange-traded funds (ETFs), process their large trades in secret through block trades. 

Yes, you read that right — large investors often deal huge numbers of shares in secret to avoid impacting market prices. 


What Are Block Trades?

A block trade is any trade consisting of a large block of shares or bonds. The Securities and Exchange Commission (SEC) defines block trades as any trade consisting of 10,000 or more shares of a stock or exchange-traded fund or any bond transaction with a face value of $200,000 or more. These are just the minimums outlined by the SEC’s definition; many block trades are far larger. 


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Block trades are made in secret through brokerages, also called block houses, that assist sellers in keeping the transaction out of the open market’s view. 

After all, the market is a system based on supply and demand. If investors saw an order to sell a large number of shares come across the tape, the public would begin selling their positions, creating two problems for the entity selling the block:

  1. Market Volatility. As general market participants began selling shares, they would cause slippage in the stock price. The downward price movement would mean the holder of the large block wouldn’t be able to sell shares fast enough to sell all the shares in their order near the price at which the trade began. 
  2. Liquidity. You can only sell a stock if another party wants to purchase it. If investors see a large block of shares being sold, they may be spooked out of their interest in the ticker, and the owner of the block may have a difficult time selling the position at all. 

Rather than making these trades on public exchanges like the Nasdaq or New York Stock Exchange (NYSE), institutional investors make them in secretive dark pools, and the investing public is typically none the wiser. 


How Block Trades Work

A block trade starts with an institutional or accredited investor who wants to offload at least 10,000 (but often hundreds of thousands) shares of a single stock or fund. The investor reaches out to a blockhouse which is a broker-dealer or investment bank that operates private, large-volume exchanges known as dark pools. 

The blockhouse facilitates the trade for the investor in one of two ways:

  1. Single Purchaser. The most advantageous route for the blockhouse to take is to find a single entity that’s interested in purchasing the entire block of shares. In this case, the purchasing entity would get a discount on the market price and the selling entity would get a reasonable price that’s close enough to the current market rate to keep them happy. 
  2. Split Sale. If the blockhouse is unable to find a single entity interested in purchasing the shares, it will work with multiple brokerages to make several small transactions that aren’t likely to spook the investing public. For example, a blockhouse in charge of the sale of 100,000 shares of stock may place 50 limit orders to sell 2,000 shares at a time at a specified price. 

The goal is the same regardless of how the blockhouse decides to process the transaction. All parties involved in the trade seek to find the best price on a large block of shares without informing the public and leading to substantial changes in market value. 

There are two sides to each block trade, like with any market transaction. 

The sell side of the trade is the party that’s most interested in keeping the trade a secret. After all, if investors catch wind of the sale, the stock price could slip, leading to substantial losses on a large position.

The buy side of the block trade is the entity interested in buying the large block of shares. Although increasing demand typically sends share prices up, the party buying the shares gets a major benefit from keeping their interest in the stock secret. 

The seller in the trade is so worried about slippage if the shares were sold on the open market that they’re typically willing to sell the large block at a discount to the current market price. If the buyer is willing to operate in the dark pool, they pay less for the shares than the fair market price and their position is immediately profitable upon the close of the transaction. 


How Block Trades Affect Individual Investors

Block trades are controversial among retail investors because many believe keeping an additional supply of or demand for shares secret from the investing public is a form of market manipulation. Although those who take part in the process generally disagree, it’s not hard to see the merit in the criticism of the practice. 

After all, prices in the market are dictated by supply and demand, so keeping large orders secret from the public until a transaction has been processed completely keeps the public in the dark. 

For example, if a large supply of a stock is dumped on the market in secret, the price per share could fall substantially, leading to losses for everyday investors. 

Even if the trade has no impact on market prices, like a trade where one buyer negotiates with one seller and no supply or demand is added to the market, it isn’t necessarily fair to retail investors. 

When retail investors want to buy or sell shares, they have to do it on the open market in public, paying open market prices or placing publicly visible limit orders stating the price their accept. Block trades give institutional investors the advantage by offering buyers the ability to buy at a discount not available to the general public and sellers a way to offload their shares without fear of market volatility


Pros & Cons of Block Trades

Block trades may sound wholly unfair, but they come with pros and cons for everyone who uses the stock market. Some of the most significant include:

Pros

Although these large trades are controversial among retail investors, there are a couple of advantages to their existence.

  1. Low Impact on Market Prices. Institutions can sell large blocks of shares in privately negotiated transactions without impacting market prices. That’s great news if you own the stock because if the sale happened on a major exchange, chances are the price would have fallen. It also means everyday investors’ shares don’t crash every time a big investor or hedge fund decides to trade a particular stock or ETF.
  2. Increased Market Liquidity. If large investors weren’t able to exit their positions without losses, they would likely invest in safer assets and there would be much less liquidity to go around on the stock market. This means that because block trades exist, you have an easier time selling shares when it’s time to exit a position than you would have if they didn’t.  

Cons

Let’s face it, these large trades are controversial for a reason — well, several reasons. Some of the biggest disadvantages to block trades include:

  1. Unfair Advantage Given to the Wealthy. These large, secretive trades give an unfair advantage to wealthy investors. After all, not everyone gets a discount when you buy shares in exchange for keeping the transaction quiet.  
  2. Unexpected Declines. If the blockhouse can’t find a single buyer, they spread the block through several trades and several brokers, hiding the fact that a single large trade is taking place. This camouflage works well, and many retail investors don’t realize such a supply of shares has hit the market until it causes price depreciation.  
  3. Dark Pools. Some retail investors argue the existence of dark pools allows hedge funds and other large investors to skirt around the rules. This belief is one of the biggest reasons retail investors hammered institutions with the Big Short Squeeze in early 2021.

Block Trade FAQs

If you’re an average investor, chances are you’ll never use a block trade, but these trades can have an impact on your portfolio anyway. It makes sense if you have questions about them. 

Block trades may be controversial, but there’s nothing illegal about them. Regulatory agencies like FINRA and the SEC know about these trades and track them closely. Although there are some special reporting requirements, neither agency has shown any interest in banning them. 

Are Block Trades Regulated?

Typically, block trades are regulated by exchanges rather than by the SEC, FINRA, or even the Department of Justice (DOJ). Exchanges typically have rules against frontrunning, which is the process of trading based on information that a block trade is taking place, but there are no rules against these large trades in and of themselves. 

What’s the Difference Between a Block Deal & a Bulk Deal?

Bulk deals are defined as any trade involving a 0.5% or larger stake in a publicly traded company. Block trades are large stock or bond trades, defined as any trade of 10,000 shares or more, and can commonly qualify as bulk deals. 

Say a publicly traded company has 20 million shares outstanding. A block trade that consists of 100,000 shares of the company would be a block trade and a bulk deal because 100,000 is 0.5% of 20 million. On the other hand, if a block trade consisted of 99,999 shares or less, it would still be a block trade but wouldn’t qualify as a bulk deal. 


Final Word

Block trades are an interesting topic because they act as a double-edged sword. 

On one hand, they’re not necessarily fair to retail investors who can’t access the same deal or the same safety when selling shares. On the other hand, they’re good for investors because they help to maintain liquidity in the market while having a minimal impact on market prices. 



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