This is a financial promotion by Retail Book Limited (FRN 994238). Values can fall as well as rise. This information is not investment advice. It is intended for UK retail investors.
You might have read about big investors moving huge amounts of shares in a single deal. These are called block trades. For years, only institutions like hedge funds and pension funds could take part. Now these deals are becoming available to retail investors through participating brokers, though access and allocation will vary.
What is a Block Trade?
A block trade is a transaction involving a large number of shares, all traded in a single deal. Usually, a big seller, for example a private equity or a pension fund, wants to sell a large stake quickly. They work with an investment bank or broker to find buyers. These buyers are often other institutions, but retail investors can now get involved too.
Block trades are different from regular trades. They often happen outside normal market hours, and are executed quickly, sometimes within 24 hours or less. Typically, the process starts with a launch announcement after the market closes. The results, including the price, are announced early the next morning before trading begins. This quick turnaround can limit immediate price impact, but prices may still move when markets open and after pricing.
How Does a Block Trade Work?
When a big investor wants to sell a large number of shares, they contact an investment bank or broker. The bank can break up the trade into smaller pieces, find a single buyer, or even buy the shares themselves. Most block trades happen off the main stock exchanges, where big investors can trade directly, away from the public eye and subsequently announced once completed.
Block trades are usually launched, executed, and priced very quickly. The seller and buyers agree on a price, often at a discount to the current market; a discount does not guarantee gains and the price may trade below the offer price after completion. This discount helps attract buyers and makes the deal happen fast. Once the trade is done, it’s posted publicly, but it doesn’t go through the usual auction process.
Types of Block Trades
There are three main ways a block trade can be structured:
- Bought deal: The investment bank buys the shares from the seller before finding buyers. The bank takes on the risk and hopes to sell the shares for a profit. This is relatively rare in the UK.
- Non-risk deal or accelerated equity offering: The bank finds buyers first, then agrees on a price. The bank earns a commission or a spread. This is the most common type in the UK.
- Backstopped deal: The bank guarantees the seller a minimum price. If they can’t find enough buyers, the bank buys the remaining shares.
Why Do Block Trades Matter?
Like any big trade, block trades can move the market. If a large investor sells a lot of shares, it can push the price down. If someone buys a large block, it can push the price up. Even if you don’t take part, it’s worth paying attention to block trades in stocks you own or are thinking about buying. Supply and demand are at work and large trades can mean big changes in price.
Block trades are often priced at a discount, which can be attractive for buyers. They also tend to have lower transaction fees than regular trades. Because they happen off-exchange, they may also help keep the market stable and avoid sudden price jumps or drops.
Block Trades vs Follow-ons
Block trades and follow-ons are both ways for investors to buy or sell large amounts of shares. The key difference is that block trades usually involve existing shares being sold by a large shareholder, while follow-ons often involve new shares being issued by the company to raise money. Both can offer opportunities for retail investors, and access to these types of deals is growing.
What Are the Advantages of Block Trades?
- Efficient execution: Large deals happen quickly and smoothly.
- Discounted price: Buyers often get shares below the market rate.
- Lower transaction costs: Smaller fees compared to regular trades.
- Improved liquidity: Makes it easier to buy or sell large amounts.
- Reduced market impact: Keeps prices stable by trading off-exchange.
What Are the Risks?
- Market impact risk: Big trades can move prices, especially if they happen on the open market. Most block trades are off-exchange to avoid this.
- Information risk: Block trades can signal changes in ownership or important events. If the news is negative, it can cause other investors to sell, pushing prices down.
- Stamp duty: In the UK, buyers may have to pay stamp duty reserve tax (SDRT) of 0.5% on some block trades.
Next Steps
Block trades are a way for big investors to buy or sell large amounts of shares quickly and efficiently. Retail investors can now join in, getting access to deals that were once out of reach. You might be able to buy shares at a discount and with lower fees.
But remember, block trades can move the market and signal important changes. Always pay attention to why a block trade is happening and what it might mean for the share price. Always read offering documents carefully and consider speaking to a financial adviser if you’re unsure.
Block trades are just one part of the bigger picture. Alongside IPOs and follow-ons, they offer new ways for retail investors to take part in the market. With more access and better information, you can make smarter decisions and find opportunities that suit your goals.
This information is not investment advice.
Retail Book Limited (“RetailBook”), a limited company registered in England and Wales (company no. 14087330) with its registered office at 10 Queen Street Place, London, United Kingdom, EC4R 1AG. RetailBook is authorised and regulated by the Financial Conduct Authority (FRN 994238).
