A block deal is generally the purchase and sale of securities in the large quantity. A trade submitted for large quantities of the transaction is referred to as block trade.
It can involve significantly large quantities of several asset classes like equities or bonds. The trade sometimes is arranged between two parties in order to fix the price out of an open market to reduce the impact of the trade on the prices of the securities.
Ideally, individual investors refrain from this kind of block trade due to its considerable size, or even if they do, it is rare. These trades generally occur when institutional investors and significant hedge funds buy and sell stocks or bonds at large quantities, through investment banks and other institutions.
Conducting block trades in the open market may adversely impact the traders, leading to impacts on the prices and volumes. Ideally, in these situations, they must be careful with respect to the trades since there can be significant fluctuations in volumes and can significantly impact the value of shares purchased. Hence, block trades are conducted through intermediaries. The hedge fund or investments banks deal through the blockhouses in order to complete the block deals.
Generally, the block trades are conducted through intermediaries called blockhouse. These firms have experience and expertise in initiating large quantity trades without triggering a volatile movement in the prices of the security. These institutions keep the traders on responsible staffs who are well versed in handling such kind of bulk orders. The staffs enhance these large amounts of deals on behalf of the company. They, however, managed to do this through other traders and firms.
Any large institution reaches out to the staff of a blockhouse for block trades. The institution remains optimistic about the optimum deal that the house collectively will help to achieve. The brokers at a blockhouse then contact other brokers once an order is placed. These other brokers are also specialized to trade in particular securities. These traders finally execute a small number of orders to fulfill the block trade.
Let us understand the concept with a detailed example. Suppose an organization wants to enter into a block trade of (20,000) shares with a price of $10 per share. Initially, the organization will seek help from a blockhouse. The staffs at the blockhouse will break this large trade into several smaller quantities of trade which is manageable. They might make smaller blocks of 2000 quantities of shares at $10 per share. It becomes easier (10 blocks) to trade traded from a separate broker in small quantities, to avoid unnecessary market volatility.
Block trades are generally more difficult and riskier to execute since these significantly expose the broker-dealer to risks. With the dealer committing to a price for a large number of securities, he must bear the full uncertainty in case of any harmful market activities. It simply means the trade can block a huge amount of capital, and also it can be an indicator of future market movements.
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