Block: Meaning, Advantages, Trading Signals

By
Adam Hayes
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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Updated June 30, 2022
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Gordon Scott
Reviewed by Gordon Scott
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Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

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Fact checked by Kirsten Rohrs Schmitt

What Is a Block?

A block refers to a large order of the same security to be bought or sold by institutional or other large investors. There is no official size designation constituting a block of securities, but a commonly used threshold is more than 10,000 equity shares or a total market value of more than $200,000. Securities traded in block trades facilitate trading by institutional investors or other large investors that require such bulk trades to meet their needs.

Key Takeaways

  • A block refers to a large volume trade that occurs at once.
  • Exchanges typically define a block as more than 10,000 shares of stock or a trade that has a notional value in excess of $200,000.
  • Block trades are sometimes done outside of the open markets to lessen the impact on the security's price. 
  • In order not to influence market prices, large block orders may be broken up into smaller orders and executed through different brokers to mask the true size.


Understanding Blocks

Users of block trades include large-scale portfolio managers and individual investors. Asset managers of large mutual funds, retirement funds, hedge funds, banks, and insurance companies take a longer-term view of markets when making investment decisions and take large positions in a stock once the decision is made. Large corporations that engage in a large stock buyback may also use block trading to execute their transactions. This type of market participant manages hundreds of millions to tens of billions of dollars. Available data show that approximately 20% of the trading volume on the NASDAQ is block trading.

Advantages of Block Trades

Extreme imbalances in the supply and demand for a particular stock result from a large acquisition or liquidation of a stock, which increases price volatility. When a fund manager decides to acquire significant stock or seeks to liquidate substantial stock that is not performing, prudence demands that the transaction be conducted in a way that minimizes the adverse effects on the market price that the overwhelming disparity in supply and demand causes.

All large-scale stock transactions have an optimal average price target set by the fund manager. Creating too much volatility may cause the price to trade away from the desired average price. Using block trades via block houses allows a fund manager to make the needed transactions in such a way that minimizes the impact on price volatility and achieves a better average price.

Execution costs are also a key concern. Attempting to fill a large buy or sell order by breaking it up into smaller transactions ultimately increases costs and may have the same adverse effect on price volatility. Block trading helps to minimize this effect.

Block Trading Signals

When institutional investors use block trading to fill a large order over a period, the price will rally or decline accordingly. Savvy day traders who are quick to spot the increase in volume on one side of the market can exploit the market imbalance and capture some easy low-risk profits from the added volatility and predictable price movements. Traders typically take a position on the same side as the transacting institutional investors and ride the price waves with them. Once the institutional investors have filled their large orders, price volatility returns to normal.

Article Sources
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  1. FINRA. "FINRA Publishes ATS Block-Size Trade Data." Accessed April 1, 2021.

  2. CME Group. "Block Trades – Participant Eligibility." Accessed April 1, 2021.

  3. NASDAQ. "Nasdaq Daily Market Summary." Accessed April 1, 2021.

  4. Zacks. "Supply & Demand in the Stock Market." Accessed April 1, 2021.

  5. Corporate Finance Institute (CFI). "What Is Volatility?" Accessed April 1, 2021.

  6. US Bank. "Sophisticated investors reduce costs with block trading." Accessed April 1, 2021.

  7. AOL. "What is a block trade?" Accessed April 1, 2021.

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