A block trade is a high-volume transaction in a security that is privately negotiated and executed outside of the open market for that security.Major broker-dealers often provide "block trading" services—sometimes known as "upstairs trading desks"—to their institutional clients. In the United States and Canada a block trade is usually at least 10,000 shares of a stock or $100,000 of bonds but in practice significantly larger.
For instance, a hedge fund holds a large position in Company X and would like to sell it completely. If this were put into the market as a large sell order, the price would sharply drop. By definition, the stake was large enough to affect supply and demand causing a market impact. Instead, the fund may arrange for a block trade with another company through an investment bank, benefiting both parties: the selling fund gets a more attractive purchase price, while the purchasing company can negotiate a discount off the market rates. Unlike large public offerings, for which it often takes months to prepare the necessary documentation, block trades are usually carried out at short notice and closed quickly.
For a variety of reasons, block trades can be more difficult than other trades and often expose the broker-dealer to more risk. Most notably, because the broker-dealer is committing to a price for a large amount of securities, any adverse market movement can saddle the broker-dealer with a large loss if the position has not been sold. As such, engaging in block trading can tie up a broker-dealer's capital. Further, the fact that a large, well-informed money manager wants to sell (or perhaps buy) a large position in a particular security may connote future price movements (i.e., the money manager may have an informational advantage); by taking the opposite side of the transaction, the broker-dealer runs the risk of "adverse selection".
Block trading is a useful measure for analysts in order to assess where institutional investors are pricing a stock, because in a merger or acquisition, a bid needs to "clear the market" (i.e. enough shareholders need to tender), it is most useful to see at what prices large blocks of stock are trading. These prices imply what the largest shareholders are willing to sell their shares for; therefore, in block trading analysis, small trades are ignored to avoid skewing the data.
A stock exchange, securities exchange, or bourse is a facility where stockbrokers and traders can buy and sell securities, such as shares of stock and bonds and other financial instruments. Stock exchanges may also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets with buyers and sellers consummating transactions via open outcry at a central location such as the floor of the exchange or by using an electronic trading platform.
A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. Financial regulators like Securities and Exchange Board of India (SEBI), Bank of England (BoE) and the U.S. Securities and Exchange Commission (SEC) oversee capital markets to protect investors against fraud, among other duties.
In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional "long" position, where the investor will profit if the value of the asset rises.
Open-end fund is a collective investment scheme that can issue and redeem shares at any time. An investor will generally purchase shares in the fund directly from the fund itself, rather than from the existing shareholders. The term contrasts with a closed-end fund, which typically issues at the outset all the shares that it will issue, with such shares usually thereafter being tradable among investors.
A closed-end fund (CEF) or closed-ended fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds, new shares in a closed-end fund are not created by managers to meet demand from investors. Instead, the shares can be purchased and sold only in the market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.
A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature. The term is typically used in the United States and India, while similar structures across the globe include the SICAV in Europe and open-ended investment company (OEIC) in the UK.
In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and derivatives trading process.
The term soft dollars refers to a Wall Street practice, especially in the asset management and securities industries, are the benefits provided to an asset manager by a broker-dealer as a result of commissions generated from financial transaction executed by the broker-dealer for client accounts or funds managed by the asset manager. In a soft dollar arrangement, the investment manager directs commissions generated by a client's or fund's transactions to a broker-dealer or other trading venue. Soft dollars, in contrast to hard dollars which have to be reported, are incorporated into brokerage fees and paid expenses, which may not be reported separately (partly due to the difficulty in their valuation. Most investment managers follow the limitations detailed in Section 28 of the Securities Exchange Act of 1934. In particular, if soft dollar arrangements are entered into with respect to registered investment companies and pension plans, compliance with Section 28 is generally required. However, hedge funds, which are generally not registered, may not be subject to the limitations of Section 28 and, thus, in some cases, the fund's commissions may be used for the adviser's benefit. In situations where fund commissions are used outside of the Section 28 safe harbor, full and comprehensive disclosure must be provided to fund investors.
An electronic communication network (ECN) is a type of computerized forum or network that facilitates the trading of financial products outside traditional stock exchanges. An ECN is generally an electronic system that widely disseminates orders entered by market makers to third parties and permits the orders to be executed against in whole or in part. The primary products that are traded on ECNs are stocks and currencies. ECNs are generally passive computer-driven networks that internally match limit orders and charge a very small per share transaction fee.
A rights issue or rights offer is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a non-dilutive(can be dilutive) pro rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus supplement. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period. In a public company, a rights issue is a form of public offering. Sometimes Right issue can give privileges to people like director, employees those are having some ownership in company to buy the issues.
Front running, also known as tailgating, is the prohibited practice of entering into an equity (stock) trade, option, futures contract, derivative, or security-based swap to capitalize on advance, nonpublic knowledge of a large ("block") pending transaction that will influence the price of the underlying security. In essence, it means the practice of engaging in a Personal Securities Transaction in advance of a transaction in the same security for a client's account. Front running is considered a form of market manipulation in many markets. Cases typically involve individual brokers or brokerage firms trading stock in and out of undisclosed, unmonitored accounts of relatives or confederates. Institutional and individual investors may also commit a front running violation when they are privy to inside information. A front running firm either buys for its own account before filling customer buy orders that drive up the price, or sells for its own account before filling customer sell orders that drive down the price. Front running is prohibited since the front-runner profits from nonpublic information, at the expense of its own customers, the block trade, or the public market.
In finance, securities lending or stock lending refers to the lending of securities by one party to another.
Alternative trading system (ATS) is a US and Canadian regulatory term for a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions. Alternative trading systems are typically regulated as broker-dealers rather than as exchanges. In general, for regulatory purposes, an alternative trading system is an organization or system that provides or maintains a market place or facilities for bringing together purchasers and sellers of securities, but does not set rules for subscribers. An ATS must be approved by the United States Securities and Exchange Commission (SEC) and is an alternative to a traditional stock exchange. The equivalent term under European legislation is a multilateral trading facility (MTF).
A crossing network is an alternative trading system (ATS) that matches buy and sell orders electronically for execution without first routing the order to an exchange or other displayed market, such as an electronic communication network (ECN), which displays a public quote. These broker-dealers employ computerized systems to match buyers and sellers of large blocks of shares without using the stock exchange. Depending on the particular broker-dealer's system and the type of securities traded, these crosses could occur at various times during the day, or after the close of trading, and could be priced at the last sale price or some other objective price, such as the midpoint between the bid and offer or the volume weighted average price (VWAP). The advantage of the crossing network is the ability to execute a large block order without impacting the public quote. Crossing networks tend to be used for highly liquid stocks and offer money managers the advantages of very low commissions, anonymity for the buying or selling account, and avoidance of market impact.
Direct market access (DMA) is a term used in financial markets to describe electronic trading facilities that give investors wishing to trade in financial instruments a way to interact with the order book of an exchange. Normally, trading on the order book is restricted to broker-dealers and market making firms that are members of the exchange. Using DMA, investment companies and other private traders use the information technology infrastructure of sell side firms such as investment banks and the market access that those firms possess, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution. Today, DMA is often combined with algorithmic trading giving access to many different trading strategies. Certain forms of DMA, most notably "sponsored access", have raised substantial regulatory concerns because of the possibility of a malfunction by an investor to cause widespread market disruption.
In finance, a dark pool is a private forum for trading securities, derivatives, and other financial instruments. Liquidity on these markets is called dark pool liquidity. The bulk of dark pool trades represent large trades by financial institutions that are offered away from public exchanges like the New York Stock Exchange and the NASDAQ, so that such trades remain confidential and outside the purview of the general investing public. The fragmentation of electronic trading platforms has allowed dark pools to be created, and they are normally accessed through crossing networks or directly among market participants via private contractual arrangements. Generally dark pools are not available to the public, but in some cases they may be accessed indirectly by retail investors and traders via retail brokers.
An indication of interest (IOI), sometimes expression of interest (EOI), is an expression in finance that demonstrates a buyer's non-binding interest in buying a security in the stock market, often before it is available for purchase. IOIs are not required, but when a firm decides to issue one, they are primarily used on two occasions: before an IPO, and before an institution places a block trade.
Stock of a corporation, is all of the shares into which ownership of the corporation is divided. In American English, the shares are collectively known as "stock". A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.
An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include an ability to:
Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.