Trading
Bybit Learn
Bybit Learn
Intermediate
Sep 16, 2022

Block Trade: A Compelling Alternative for Institutional Traders

The act of trading large quantities of stocks, equities, or other securities can create significant price movements in the public market (e.g., Nasdaq). To prevent volatility, investors or traders may choose to place block trades OTC (over the counter) or in the private market instead. 

In most cases, the market participants of such a trade are large institutions, such as credit unions, real estate investment trusts and investment banks. However, block trades can also be carried out by individual investors. Here’s everything you need to know about block trades.

What Is a Block Trade?

A block trade is a large order of securities executed as a single transaction. Block trades are typically used by institutional investors, such as hedge funds and mutual funds, to buy or sell large quantities of securities in a bid to avoid market volatility.

Block trades are usually made at a discounted price, and can be considered as a sort of private purchase agreement, as they often occur after the market has closed for the day.

Block trades are risky since they usually involve multiple shares or bonds. If the security price moves against the block trader, they may suffer significant losses. For this reason, it's imperative that block traders have a good grasp of both the market and the assets they’re trading.

Additionally, as block trades aren't subject to the same regulations as regular trades, they can be conducted without having to provide information about the trade. This lack of transparency has created controversy in the trading community, with some critics arguing that block trading gives larger investors an unfair advantage over the rest. Nevertheless, the fact remains that block trading is an essential part of modern financial markets, and plays a vital role in facilitating institutional investment overall.

How Many Shares Does a Block Trade Have?

Block trades usually involve a large number of shares or bonds. For example, in the stock market, a block trade of Apple stock (ticker symbol: AAPL) might involve buying or selling 100,000 shares of it.

The size of block trades can vary. Some block trades might involve “only” a few hundred shares, while others might involve as many as millions of shares. There is no set minimum or maximum size.

How Do Block Trades Affect Price?

Block trades affect the price of stocks by allowing large institutional investors to buy or sell large quantities of securities without causing large price movements in the market. As block trades typically occur off-hours or on private exchanges, institutional investors can avoid the volatility that would occur if they tried to buy or sell the same quantity of securities on the open market.

Given that block trades involve a large number of securities, they usually carry a discount on regular stocks, benefitting the aforementioned institutional investors.

Example

Let's assume a hedge fund wants to buy $10 million worth of AAPL. If the hedge fund places an order today for $10 million worth of AAPL on the open market, the move would likely push up the price of each AAPL share. By executing a block trade on a dark pool, however, the hedge fund can buy the same amount of AAPL without causing a ripple effect — orders are kept anonymous, and no order book is available to the public.

How a Block Trade Works

Block trades aren't conducted on public exchanges like the New York Stock Exchange (NYSE) or Nasdaq. Instead, they’re typically conducted OTC or on private exchanges.

OTC block trades are usually transacted between two large institutional investors, such as two investment banks. The trade is arranged through a phone call or an electronic chat system. Once the trade is agreed upon, it will be executed.

Block trades on exchanges are open to all investors, not just institutional investors. They’re conducted through a process called “request for quote” (RFQ). As its name implies, RFQ (which is an electronic system) allows traders to request quotes from multiple market makers. Once the RFQ is submitted, market makers will provide quotes to the trader. The trader can then select the best quote and execute the trade accordingly.

Example

In the crypto market, block trades are often used to buy or sell large quantities of digital assets such as Bitcoin (BTC). A block trade of BTC might involve buying 25,000 BTC in a single transaction.

Benefits of Block Trading

  1. Block trading allows institutional investors to buy or sell large quantities of securities at a discount.
  2. Transaction fees involved tend to be lower than trades conducted on the public market. For example, no exchange fee is required for dark pool trades.
  3. The markets benefit from block trading because it provides liquidity, the ability of the market to buy or sell large quantities of securities without moving the market.
  4. Without block trades, institutional investors would find it difficult to buy or sell large quantities of securities without moving the market, therefore reducing market liquidity.

Risks of Block Trading

  1. Typically conducted OTC, block trading isn’t regulated as much as trading on public exchanges. This lack of regulation means block trades carry a higher level of risk.
  2. Block trades are typically conducted between two large institutional investors, and involve complex strategies that may be difficult to understand.
  3. Usually, such trades involve a large number of shares or bonds. Therefore, block trades can be expensive for the lone investor.

Should You Try Block Trading?

Block trading may not suit everyone’s risk appetite. Additionally, retail investors usually don’t have the resources or the knowledge to conduct block trades. If you’re a retail investor, consider other types of trading, such as trading on public exchanges, which are more regulated and less complex to navigate and use.

How to Make a Block Trade on Bybit

Bybit has teamed up with Paradigm (an OTC automation solution for crypto trading) to offer its institutional traders a block trading service.

If you want to block trade on Bybit, follow the steps below:

1. Log in to your Bybit account and complete the KYC verification process for your company or institution.

2. Create an API Key that will allow you to perform a block trade.

3. Fill out the application form on Paradigm to request access.

4. Since Bybit is working with Paradigm, the next step will require you to register an account on Paradigm through the code sent to your email.

5. After logging in to Paradigm, you’ll be able to see all the block trading orders available on your Paradigm dashboard.

6. You can send RFQs, receive quotes and execute trades on the Paradigm app once the setup is complete.

7. After you’ve executed a trade, you can go back to view your trade history on Bybit.

The Bottom Line

In general, block trading can be a good way for institutional investors to buy or sell large quantities of securities without moving the market. This block trading analysis article is for your reference only. If you're thinking about making a trade, we highly encourage you to DYOR and understand the risks and rewards involved before you begin.