What is a block trade?

A block trade refers to the purchase or sale of a large number of securities in a single transaction, typically involving stocks or bonds. These trades are negotiated privately to prevent significant fluctuations in the stock price.

In India, the Securities and Exchange Board of India (SEBI) has established that a block trade can involve the purchase of 500,000 shares or more, or securities valued at ₹5 crores or more.

Features of the block trade

Now that you understand the meaning of block trades, here are some unique features of block trading in the stock market.

• Private Negotiation:

• Block trading helps avoid the direct influence of large transactions on market price by maintaining confidentiality.

• Execution of the open market:

• These trades are typically executed through dedicated trading windows, such as the Block Deal Window on exchanges like NSE and BSE, or via broker-dealers, to minimize price fluctuations during standard market hours.

•  Institutional participants:

• Institutional investors like hedge funds, mutual funds, pension funds, foreign institutional investors, and high-net-worth individuals (HNIs) are the primary participants in block trades.

Benefits of the block trade

1. Minimized market impact

Block trades allow large transactions without causing significant price changes, preventing slippage and market disruption.

2. Reduced information leakage

These trades are usually executed privately or within dedicated windows, which helps maintain their privacy and prevents competitors from reacting prematurely.

3. Liquidity provision

It helps provide liquidity when an investor needs to sell a large amount of shares but can’t find enough buyers at the market price.

Rules of block trade in the stock market

Below are some essential rules of block trading in India. Adherence to these rules is mandatory to avoid penalties and maintain fairness in the stock market.

• Reporting

Any transaction involving at least 0.5% of the total shares of a listed company must be reported as a block trade. This ensures transparency in the stock market.

• Price range

The approved price for the block trade must fall within a pre-decided price range. It helps in avoiding wild fluctuations in stock prices.

• Timings

Block trades must occur during a specified time frame known as the block trading window. There are two such windows – The Morning Window (08:45 AM to 09:00 AM) and the Afternoon Window (02:05 PM to 02:20 PM).

• Settlement

Block trades are settled more quickly than normal trades. This helps in mitigating counterparty risks.

How are block trades done?

Block houses are specialised brokers or institutions that facilitate block trades in stock markets for institutional investors. They use various strategies to execute large trades with minimal market disruption:

– Dark pools: These private trading platforms allow block trades to be carried out anonymously, away from the public market.

– Iceberg orders: Only a small portion of the total order is visible to the market at any given time, with the rest of the quantity kept hidden.

– Direct negotiation: The buyer and seller negotiate the terms of the trade directly, often through a broker or trading platform, without the need to go through the public exchange.