Meaning of a Block
A block refers to a huge order of the same security to be purchased or sold either by institutional or other big investors. Block traded securities facilitate trading by institutional investors or other large investors who require such bulk trading in order to meet their needs.
Lets Understand What a Block is in Detail
Block trading users include major portfolio managers, as well as individual investors. Asset managers of big mutual funds, hedge funds, retirement funds, insurance firms, and banks take a longer-term view of the markets while making investment decisions and undertake large positions in stock once the decision is made. Large corporations engaging in large-scale stock buyback may also use block trading to execute their business.
Advantages of Block Trading
Extreme supply and demand imbalances for a specific stock result from a large acquisition or liquidation of a stock which increases price volatility. When a fund manager wants to buy substantial stock or tries to liquidate substantial non-performing stock, prudence calls for the deal to be performed in a way that minimizes the negative effects on the market price generated by the enormous difference between supply and demand.
All large-scale stock transactions have the fund manager set an optimal average price target. Having too much uncertainty will separate the price from the optimal average price to trade.
Using block trades through block houses allows a fund manager to make the required transactions in such a way that the effect on price volatility is reduced and a better average price is achieved.
Cost of execution is also a primary concern. Attempting to carry out a large buy or sale order by splitting it into smaller transactions inevitably raises costs and may have the same detrimental impact on market volatility. Trading in blocks helps to mitigate the impact.
