A block trade is a group trade of a single security. By definition, a block trade is made up of at least 10,000 shares of a stock,  or $200,000 of bonds by one party. This often occurs between two institutional investors. In a block trade, the seller can protect the total price of the stock from dropping when the market is flooded with a large sell order. 

Purpose of a Block Trade

An institutional investor may need to financially restructure and liquidate a portion of its assets. If they own more than 10,000 shares in one particular company, it is heavily-invested. The investor may consider placing a sell order for the shares without ordering a block trade. In this case, the broker would individually sell each share to an interested buyer.

The challenge is to keep the price stable. Since there will be a large influx of shares for sale, the price of the stock will naturally drop sharply. The institutional investor would stand to lose a large sum of money just by liquidating the entire holding at once. To counter this effect, the investor orders a block trade. The broker then attempts to sell the entire block to a single investor. This stops the price of the shares from dropping because the market is never officially flooded with the shares.

Ordering a Block Trade

Most investment brokers are cleared through a block house. A block house is a special type of clearing house designed especially for institutional clients who are looking for large holdings. Since the block house has clients who may be interested in a block purchase, the block house can arrange for the transfer to occur must faster than a private broker.

Effect of a Block Trade

Analysts closely watch when shares are traded in bulk and individual investors will often follow larger investors. When an investor sees that a block trade has occurred, they may have a tendency to consider selling their shares in the same company. The block trade may have been executed for internal reasons, however, individual investors are still likely to draw the conclusion that it may be a good time to sell. For this reason, the execution of a block trade can still drop the price of a security on the market.

Watching for Block Trades

Since the market can interpret a block trade as a negative activity on a security, the price of the security may drop after a block trade. If you are holding a number of shares in that security, you may consider unloading your shares along with the market. It is important to review the financial standing of the company first. You may notice the trade does not seem to correlate with the company's performance. It can be beneficial to hold on to your shares if the company remains financially sound. If a company is in good health, the price will usually rebound and exceed their previous limit.

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