By Larry Wright
Introduction
The cryptocurrency industry is dependent not only on retail investors but the movement of big players can also make a significant impact on it. Therefore, every investor should know about trading events such as Block trading.
This article is going to allow the reader to take a peek inside the mind of block traders to find out the forces that affect the markets. In doing so, every investor can prepare themselves to deal with the market changes that arrive with whale investor movements.
What is a Block Trade?
Block Trade is the method of purchasing stocks or cryptocurrencies in bulk amounts. Block Trades are carried out by institutional or high-net-worth individuals. They are not about purchasing assets in decimals or even in hundreds.
Block Trading deals with a singular purchase or sale of thousands or millions of shares or cryptocurrencies. Therefore, understanding block trading is important for investors because these bulk tradeoffs can make impact the prices of the overall stock or cryptocurrency.
How does Block Trade Work?
Usually, block trades are instigated by institutional investors like hedge funds, banks, insurance companies, and other financial enterprises. In most cases, Block Traders are financial enterprises and brokers who are making trades on behalf of their clients.
For example, a qualified broker or a financial enterprise can create a mutual fund and invite investors from different walks of life to invest their money in it. It is worth mentioning that block trades are usually privately held transactions.
When the required number of investors has gathered the desired amount of money for the broker to commence the purchase, he/she can use this capital and buy stocks in bulk.
According to the NYSE and the NASDAQ, any singular purchase or sale of stock greater than or equal to 10,000 units or has an estimated value of $200K should be classified as a block trade.
Furthermore, there are also many cases where block traders can operate outside of the main markets, such as stock exchanges, under the pretext of the law. In most cases, block trades are broken into smaller pieces and executed through different brokers to hide their actual mass.
Basic Components of Block Trade
Investors must hear about several complex terminologies that are specific to the financial ecosystem. Therefore, they might not be able to understand how the block trade works properly. To smooth out these rough edges, here are some of the most important block trade terms that every investor must know to fully grasp this concept:
Dark Pools
Dark Pools are the liquidity markets that are hidden from public access to enable bulk trades. It means that while all investors are allowed to purchase stocks from a publicly listed company, bulk buyers are granted an exception.
The institutions have reserved a right to keep the biggest stock purchases a secret from the public eye. This is enacted to prevent any major market changes from happening on account of these bulk tradeoffs and maintain market transparency. Dark Pools are often put in the category of alternate markets.
Therefore, these dark pools are liquidity markets where institutional investors can carry out the sale and purchase of stocks in huge quantities without revealing their identity. In most cases, Dark pools exist outside of the conventional stock exchange market.
In most cases, Dark Pools have legal status, and they are recognized by the law of the land. The Securities and Exchange Commission of the US introduced a new law in 1979 for Block Traders.
Investment Banks
An Investment Bank is a financial management company that also acts as an intermediary between the parties that are performing block trades. Block Trade is defined as a complex and large-scale financial transaction; therefore, the procedure to carry it out is not as a simple stock purchase.
In many cases, Investment banks can help startups to organize IPOs or play a role in negotiations when a corporate merger is underway. These banks also provide their services when there are large institutional clients for long-term and large-magnitude financial plans such as pension funds.
Some examples of Investment banks are JPMorgan Chase, Morgan Stanley, Credit Suisse, Deutsche Bank, and Bank of America. These banks also perform financial functions like performing in-depth research, merger and acquisitions, and acting as financial advisors.
Mutual Funds
Mutual Funds are a financial enterprise that pools money from several investors. This money pool is used to invest in stocks, bonds, and short-term debt. Investors do not own any of the financial instruments that a mutual fund has acquired.
On the contrary, investors who wish to invest in a mutual fund must purchase the shares that are issued by this financial management company. Since mutual funds have access to a large pool of money, it means that it often dabbles in block trading.
Hedge Funds
A Hedge Fund is a company is also a financial management company that collects funds. However, the funds are contributed by high net worth and a private pool of investors. The hedge fund is headed by one or more professional broker who has a proven track record and experience in the investing markets.
In most cases, people agree to invest in a hedge fund based on the performance and reviews of the main fund manager. Just like mutual funds, hedge funds also purchase stocks and other investment products in bulk and use block trading techniques.
OTC Markets
OTC or Over-the-Counter markets are the trading places where investors can conduct sales and purchase of stocks or other financial instruments. However, these markets exist outside of the bounds of conventional stock markets.
In some cases, peer-to-peer trading can be classified as an OTC market. Furthermore, the decentralized markets can also be seen as another form of OTC markets because they are outside of the regulated financial markets such as NYSE and NASDAQ.
RFQ
RFQ or request for quote is a document that specifies the price quotes that are sent by a financial enterprise as a proposal for Block trading.
In most cases, RFQs are standalone documents issued by an individual entity; however, in some cases, they are accompanied by RFP (Request for Proposal) documents.
Why Do Retail Investors Worry About Block Trades?
In most cases, retail investors are mere spectators when it comes to blocking trading. For the most part, retail investors often do not hear about Block trades taking place due to the extra care taken in this matter. However, in the case of cryptocurrencies, there are several online bots and cryptocurrency aggregator programs that are tracking the performance of whale digital wallet addresses at every moment. These updates allow retail investors to stay informed about all major purchases in real-time.
When Block trades happen, it means that a single entity or person is in control of a sizeable portion of a company’s shares or cryptocurrencies. Therefore, when these behemoths decide to move, it means that they can shake the market considerably by exerting selling or buying pressure on the market.
If there is a sizeable sale, it means that the supply of the cryptocurrency increases in the market, and the prices can drop and vice versa.
Suppose that a company named XYZ public limited issues 100 shares during its listing ceremony. The company is thought to make progress in the coming days. Therefore, it attracts the attention of some big financial enterprises.
One of these enterprises is ABC funds, and it ends up purchasing around 25 shares of XYZ Corporation through a block trade procedure. After a few years, the prices of the XYZ stock increased by 500%, hypothetically speaking. However, the ABC funds now decided to sell out and take profits.
Therefore, the enterprise ends up selling its 25 shares. As a result, the incrementing prices of an XYZ stock crash down and back to its initial price. On the contrary, the demand and prices of the XYZ stocks increased exponentially when ABC funds invested in it.
Types of Block Trading
Here are some of the most useful types of Block Trading:
Buy Side Block Trade
The Buy Side of Block trading is made up of the companies that are making the trades on behalf of the investors or other clients. Some good examples of Buy Side are pension funds, provident funds, hedge funds, mutual funds, and insurance companies.
In most cases, the buy side is seen acquiring big chunks of securities and other trade instruments. Furthermore, these companies are using alternative trading systems for making block trades.
Sell Side Block Trade
The sell Side of the Block Trade is made of the companies and financial entities that are doing the work of creating securities and providing options for the buy side. Some good examples of the sell side are investment banks and advisory firms. In other cases, accelerated bookbuilds and Bought deals can also be ranked under the flag of the sell side.
Meanwhile, Bought deals are used to sell the collective holdings of an affiliated shareholder. In the same manner, these bough companies can often also perform the shelf filling with SEC or their native securities regulators.
Advantages of Block Trading
Bulk Discount
When institutions take an interest in purchasing a large consignment of stocks or other trade instruments, they create massive market activity. Therefore, these investors can benefit from discounted prices out of the wholesale effect.
These discounts matter in the long run since the operating costs of performing block trade is usually high on account of its complex structure.
Lower Transaction Fees
For Block Trades, the transaction fees are often lower in comparison to a standard tradeoff. There are also many cases where the exchange fee is diminished altogether on platforms such as dark pools.
Therefore, there is another upside for the big players to engage in a block trade in addition to gaining control over the market and making huge profits.
Liquidity Provider
There are many cases where the block trade acts as a liquidity provider for the whole market. In case of an absence of block traders, the market can potentially suffer from a lack of willingness to purchase so many shares in one go or have the capacity to harbour large share reserves for the long term. At the same time, these liquidity markets also allow block traders to perform big transactions without shaking the market fundamentally.
Capital Inflow
Block Traders are a major source of income and stability for stock issuers and cryptocurrencies. In many cases, the enterprise acquisition share of a company is almost as big as the entire retail market share as a collective.
In case a company is struggling to remain operational, a block trader can pitch in and grant them financial support by purchasing a bulk of their shares in a single swoop. The same company will require a lot of time and campaigning to collect the same funds from the retail sector.
Market Research
The presence of block investors makes the process of market research easier in comparison to a retail investor-dominated asset class. Calculating the strategy and trading patterns of a single financial enterprise is mathematically more convenient than trying to make sense of the collective impact of the approximation of thousands of investors acting in an individual capacity.
This is the main reason that these financial institutes are always under the observation of professional analysts and investors.
Limitations of Block Trading
Here are some downsides or risks associated with Block trading that every investor should be aware of:
OTC Platforms
In most cases, block traders are required by the law to make these dealings in an OTC platform. To this end, the rules and regulations that protect the transaction makers are often changed or absent.
Therefore, block trade can be seen as a trading strategy that can increase the risk ratio for the traders. The companies that are performing these trades must have enough resources to check the background of the organizations that they are dealing with. Otherwise, they have to deal with a considerable amount of risks and losses and could even come across financial scams.
Complex Structure
The structure of a Block trade is often complex and filled with technical jargon. Therefore, it is almost impossible for an individual investor to carry it out or understand it. It takes a considerable amount of training and insight to make sense of these trading structures.
At the same time, the block trading parties need to exert a lot of their energy into carrying them out properly. If they face issues in the middle on account of a sudden change in the laws or political support, they might have to start again or lose money.
Out of Reach
In 99.9% of the cases, Block trading is out of reach for retail investors. Not only are investors not able to make these trades as they require a lot of capital and resources, but they are often unaware of these altogether.
This is the underlying function of Block trading to keep the bulk investment tradeoffs hidden from the reach of the retail investors. Therefore, investors may need to upgrade their skills or consult with professional brokers to gain access to this information.
Extra Cost
One of the biggest setbacks for block trading is that it requires massive costs. It means that investors have to purchase their products in bulk, so they have to gather the required legal expertise and other resources to become efficient enough to collect that sort of capital.
By the laws of economics, if we consider that time is also a utility in the same way as money or human input, block trading is going to require a massive quantity of all of these three utilities.
Market Manipulation
Big corporations can exert their dominance in the marketplace using block trading. At the same time, they can act as hidden actors and still manage to control the direction of the market without arousing any suspicion from the investors.
In some cases, block trading can also pave the way for creating monopolies. Big corporations can secretly acquire the bulk shares of all the major corporations hailing from a single sector and end up asserting a monopolistic rule over these enterprises.
Conclusion
Block Trading is a useful market tool that comes with its benefits and downsides. Just like every other trading strategy, investors can learn a lot from reading about and looking at it from a diversified set of perspectives. Block traders are more of a goal for retail investors, and they can increase their knowledge of the financial markets by learning to understand them.