Insights and Market Perspectives

When only a block trade will do

April 9, 2018

Most of the buying and selling that takes place during the trading day is done with the press of a computer button and with relatively small share lots changing hands. These “non-block” trades are a testament to the equity market’s overall liquidity and represent more than 80% of the total daily volume on many major stock exchanges around the world.

But not all trades follow the same pattern. For larger transactions, when flow is tight and time is of the essence, there’s often no better option than to pick up the phone and find a big block of shares to get the job done.

Block trades in Canada (as a percentage of all trades transacted across multiple platforms)

Source: AGF Investments

Block trading, as it’s known, is typically defined as being the purchase or sale of at least 10,000 shares and/or a trade worth $100,000 in total value. It is often associated with institutional investors and generally involves direct communication with the broker community to find the other side of the trade.

Let’s say, for example, that you want to buy 10,000 shares of Acme Corp., a fictitious stock that is thinly traded and moving sideways – meaning there’s no price action in either direction.

Because there’s not a lot of liquidity, but you like the current price level, you decide to contact one of the broker dealers on the “street” to tell them you’re a block buyer and want them to find you a seller.

The broker would then provide feedback on what he or she knows about the market for that stock. And following that, an agreement is reached on the price you’re willing to pay. This is generally done within what’s called “the context of the quote” whereby any deal eventually reached nets out somewhere between the current bid and ask price, although at times outside the current bid and offer if we decide the quote is “noisy” with a lot of high frequency volume.

From there, you send the broker an electronic order to formalize the request and once they’ve found a seller, you get back on the phone to negotiate a final price and complete the trade.

All of this, start to finish, usually takes a few minutes to transact, but that’s almost always time well spent. When liquidity is lacking, a block trade can be the best way to ensure your bigger trades are executed at the price you’re willing to pay.

John Christofilos is a senior vice president and chief trading officer at AGF Investment Inc. He is a regular contributor to AGF Perspectives.

Commentaries contained herein are provided as a general source of information based on information available as of April 4, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.