Explained by AI (and I): Block trades
Definition
A block trade is a large transaction, typically involving a substantial number of securities, executed outside of the open market to avoid impacting the security’s price significantly. These trades are usually conducted by institutional investors, such as hedge funds, mutual funds, or pension funds, which need to buy or sell large quantities of securities without causing dramatic price movements that can result from executing large orders on public exchanges.
Significance
Here are the key points to know about block trades:
- Size and execution: Block trades usually involve tens or hundreds of thousands of shares, arranged privately between parties or through specialized brokerage desks to maintain discretion.
- Market stability: By executing large trades privately, block trades help prevent dramatic price movements and maintain market stability, avoiding the volatility that large public orders can cause.
- Efficiency and confidentiality: They offer a more efficient way for institutional investors to move large positions without delay or price slippage and keep their trading strategies confidential.
Application
The NSE last year amended its trading rules to accommodate block trades, aiming to boost market liquidity. At the NSE, block trades constitute the sale of shares whose value:
- exceeds KES 3 billion, and constitutes between 5% and 24.99% of the company's total issued shares; or
- is less than KES 3 billion, but constitutes between 15% and 24.99% of the company's total issued shares.
The amendments also provide for more flexible pricing of block trades allowing for a 30% price range based on a one month average. The NSE reports block transactions as 'off-market transactions', except for their impact on the total market turnover.
--
Block trades are essential for managing large-scale transactions discreetly, promoting market stability, efficiency, and confidentiality for institutional investors. Understanding this will help you navigate the markets better.
