● block trading refers to a large, privately negotiated securities transaction.
● block trading takes place outside the open market.
● generally speaking, buyers of bulk transactions will get a transaction price at a discount to the market price.
Detailed explanation of concept
Block trading, also known as block trading, is a large-scale, privately negotiated securities transaction.
In order to avoid having a negative impact on the price of the open securities market, bulk trading is not carried out in the open market.
"bulk trading" services are generally provided by brokers to institutional investors.
Each exchange has a clear definition of block trading and varies from one exchange to another. The New York Stock Exchange and Nasdaq define block trading as trading of at least 10000 stocks or stocks worth more than $200000.
The prices privately agreed by institutional investors in bulk transactions can be used as an important reference when valuing stocks for other investors or analysts. The bulk trading price can be said to be the price that the major shareholders are willing to accept, ignoring the impact of small transactions on the price.
The case of bulk trading
For example, hedge fund Y holds 100000 shares in Company X and wants to sell all of them at the current market price of $13. Company X's market capitalization is relatively small, close to $8 million.
If hedge fund Y hangs an order on the open market, the trade could significantly depress market prices. Because the volume of the transaction is large enough to significantly affect the supply and demand of Company X's shares, it will quickly push down the transaction price of the shares.
To avoid this, hedge fund Y can arrange a block trade with another investor (usually an institution) who is willing to buy all 100000 shares of Company X.
Generally speaking, block trading is good for both sides: the seller gets a more attractive transaction price than placing an order in the open market, while the buyer can negotiate a transaction price at a discount to the market price.