What is Block Trade?

Block trade describes a large-scale transaction where traders buy and sell a considerable number of securities without having any effect on the market price. Blockhouses are often used in block transactions as financial intermediaries.

Block trading is typically conducted by institutions and hedge funds, given the substantial transaction sizes. Individual traders tend not to participate in block trading. This method of trading is similar to over-the-counter trading (OTC trading) as it is designed to be confidential.

During block trades, large-scale hedge funds and investors buy and sell massive amounts of bonds and shares via mediators like investment banks.

In open market block trading, participants must be cautious in case their transaction volumes affect the market value. To avoid this, traders rely on an intermediary rather than trading with hedge funds or investment banks directly.

According to the New York Stock Exchange, block trades normally contain 10,000 shares in the stock market or $200,000 in bonds in the treasuries market at the minimum. In most cases, the volume of block trading exceeds the minimum threshold, as the parties involved are corporations and equities.

For example, if a hedge fund wishes to sell 500,000 shares of one company for $10 each, the process can be completed in one or more transactions.

A blockhouse, acting as the middleman, finds the sellers and is responsible for contract negotiation and finalization. The blockhouse decides whether the shares will be sold to one party or split among several buyers.

Every transaction in a block trade occurs simultaneously. Utilizing a blockhouse helps maintain low market volatility and reduces the risk of slippage between trades.

Blocks are considered to be over-the-counter (OTC) commodities. They are not typically traded in the open market or a centralized exchange. This is done to ensure that the price of the securities remains stable as the open market experiences value and volume fluctuations.

Futures trading acts as a contract obliging the participating parties to trade a financial asset at a predetermined price in the future. Options trading follows a similar structure. However, the buyer has the right but not the obligation to follow through with the transaction.

In its essence, block trading functions similarly in a blockchain ecosystem. This method of trading is commonly used in some of the biggest cryptocurrency exchange platforms.

Some, like Binance, provide block trading mechanisms for large-scale crypto transactions. OTC trading can also be effectively employed in crypto trading as it does not severely impact the market price of a token.