Block Trade

November 21, 2023 - Around 3 mins mins to read

Understanding Block Trades

A “block trade” is a significant transaction involving a large order. These transactions are facilitated by a financial intermediary called a blockhouse, which helps investors manage risk. Block trades involve buying and selling a substantial number of securities simultaneously without impacting the market price.

Institutions and hedge funds typically engage in block trading due to the large size of these transactions. This type of trading is similar to over-the-counter (OTC) trading in terms of its confidential nature.

Individual investors are generally not involved in block transactions due to the large scale of trades in both the debt and equity markets. Instead, hedge funds and large-scale investors conduct block trades through investment banks and other intermediaries.

When conducting a block trade on the open market, traders must be cautious as the transaction can result in significant volume changes and impact the market value of the acquired shares or bonds. Therefore, block trades are typically executed through a middleman rather than directly from a hedge fund or investment bank.

According to the New York Stock Exchange, a block trade in the stock market should involve at least 10,000 shares, while in the treasuries market, it should be $200,000 in bonds. However, in reality, these amounts are often much larger. Block trades involve well-known corporations or blue-chip equities and are classified as over-the-counter (OTC) commodities, traded outside the open market or a centralized exchange. This helps maintain the price of the securities as the open market fluctuates.

In the futures market, blockchain technology plays a significant role. Futures trading involves a contract that allows two parties to buy and sell a financial asset at a predetermined price on a future date. While similar to block trading, futures trading operates on a much larger scale and includes derivatives related to stocks, foreign currency, commodities, and indexes. A block transaction in futures or options stands out from others in the same category.

To better understand block trading, consider the following scenario: If a hedge fund wants to sell 350,000 shares of a company at $5 each, it can do so in one or multiple transactions. A blockhouse acts as an intermediary, connecting buyers and sellers, negotiating contracts, and overseeing the process. The hedge fund may choose to sell all 350,000 shares to one interested party or find 35 buyers who purchase 10,000 shares each. These transactions occur simultaneously. By utilizing a blockhouse, market volatility is kept low, and slippage between trades is minimized, as financial securities can sometimes experience unexpected price changes.

In the blockchain environment, block trading follows similar principles. Many major crypto exchanges, such as Binance, offer customized block trading mechanisms for trading large block sizes, typically exceeding 10 BTC. Additionally, these exchanges provide over-the-counter (OTC) trading as an alternative to trading directly on exchange order books for large orders, reducing the risk of affecting the token’s market price and execution level.