A block trade is a privately negotiated securities, futures, options, or combination transaction executed apart from the public auction market, either on or off an exchange trading floor. There are minimum order-size requirements that vary according to product and order type, and eligibility for engaging in such trades is strictly regulated. Regulations vary by exchange. In futures trading, participation in block trades is restricted to Eligible Contract Participants as that term is defined in the Commodity Exchange Act.
Traditionally, a block trade has meant any trade over 10,000 shares, but today requirements vary. Typically, a brokerage firm is a party to the block trade with one of its customers, but the firm can also be used to bring two customers together in what is referred to as an “agency” block trade.
Block Trade Facilities
Many exchanges have a block trading facility that allows members to transact business of significant size as a bilaterally agreed transaction and then bring it to an exchange. A futures block trading facility has so far only been made available to large institutional investors who qualify as “eligible participants” under Part 36 of the CFTC rules. In the futures industry, once a block trade has been established, the parties to the trade can use the futures market to hedge their position and then to unwind it, thus bringing more trading volume to the exchange.
Some exchanges require that the block trade be reported in 15 minutes or less, but reporting time differs between exchanges. It can vary with the size of the respective block trade. The larger the size of the block trade, the more time the parties need to hedge or offset their risks, and the more time they need to report it.
Chicago Mercantile Exchange
CBOT Rule 526 and CME Rule 526 ( "Block Trades" ) govern block trading in CBOT and CME products, respectively. Block trades are permitted in specified products and are subject to minimum transaction size requirements which vary according to the product, the type of transaction and the time of execution. Block trades may be executed at any time at a fair and reasonable price and are required to be reported to the CME Group Globex Control Center ( "GCC" ) within five minutes of the execution time, except for Eurodollar, Housing and Weather futures and options which are subject to a 15-minute reporting requirement. Block trades executed when the GCC is closed must be reported no later than five minutes prior to the opening of the next electronic trading session for that product.
The Block Trade Facility at Liffe allows members and their wholesale clients to transact business of significant size as bilaterally agreed transactions on-exchange, without delay and with certainty of price and execution. The Facility complements Liffe's central markets, which continue to be the primary method for trading the exchange's products.
The Block Trade Facility is available for the following Liffe equity products: All index products (excluding CAC 40 future and FTSE 100 Index FLEX options and all Dutch products); all individual stock options (UK, France, Belgium ; excluding Netherlands); All USFs and SSFs.
Australian Securities Exchange
The Australian Securities Exchange’s (ASX) new block trading service was set to go live on June 28, 2010. The platform, called VolumeMatch, will help institutions transact large orders in Australian stocks, with the aim of reducing market impact and information leakage by allowing members to hunt for liquidity anonymously.
VolumeMatch, which will be open to both buy- and sell-side institutions, will segregate proprietary and client order flow from brokers on an independently audited basis. Orders sent to the platform must have a minimum value of A$1 million and will derive their prices from quotes on the ASX’s main market, to help limit liquidity fragmentation and protect the price discovery process.