If you are an investor or interested in the market, you probably have heard the term block trade thrown around. This refers to a large number of securities that are being traded all at once by one single investor or mutual fund. Typically, when you hear this word used by financial reporters, they are talking about the block trades executed by mutual fund managers as an indication of how sentiments on certain stocks are changing.
A block trade is not millions of shares, and it has nothing to do with multiple investors. Block trades are usually executed on the NYSE or NASDAQ stock exchange just like any other order. The only difference is a large number of shares (10,000 or more) are being traded. While a large number of block trades may sound scary, it is not reason to sell everything you own, because they are not always the best indicators of the market's condition.
A block trade involves at least 10,000 shares of a common stock. The trade can be executed by any type of investor, from any account including your own personal account. However, most block trades come from mutual funds or investment companies. These companies and managers must buy and sell in large chunks of stock, so they are always executing block trades. There are no restrictions on block trades; however, the stock market can be affected by them, so if they threaten to disrupt trading, a block trade can be blocked, or assisted, by a market specialist.
When you sell 100 shares of stock, the order goes into the market computers and is distributed to buyers who have entered bids for shares. Your shares are then transferred to these buyers to fill their orders. At any given time there are typically hundreds of investors looking to buy and sell shares. So, there is no problem filling this order. But what happens when someone wants to sell 1 million shares? There may not be enough buyers to absorb all these shares. That means the price of the stock must drop, so more buyers can enter the market. In this case, a market specialist may be called upon to assist a block the trade. They will buy up large blocks of the shares themselves, hold them for a short period of time and then sell them as new buyers come to the market.
A block trade will "move the market" only if the size of the block trade is much greater than the typical volume of shares traded on that stock in any particular day, and the stock is part of a major index that other investors watch. A simple block trade can greatly affect the price of a small stock in any given day, especially if there are not enough buyers to absorb the large sale. If a block trade is bought up by many smaller investors, it is thought to be a bad sign, because smaller investors are typically thought of as less powerful. If the entire block trade is bought up by other financial fund managers, then it is considered a simple redistribution of shares.
Many day traders will watch block trades on particular stocks to determine what type of interest they are attracting. A lot of large buys (buys of 10,000 or more) indicate buys by mutual funds and institutional investors. That is a good sign for a stock because institutional investors will hold shares longer and buy up a lot of "sell" interest, or investors who are finished with the stock and want to sell. Many block sells, sell orders of 10,000 or more, indicate that the smart money or large investment houses are starting to unload their shares. That is bad news for shareholders, because it usually pushes the price down.