What is a Block Order?

Also known as a block trade, a block order is a trading order that is sufficiently larger than most standard size orders. Typically, a trade of this type must involve a minimum number of shares or amount to a minimum value of securities to qualify as a block order. There are several ways to structure this type of order or trade, with each method presenting certain benefits and disadvantages.

The most straightforward approach to a block order is to present the massive number of shares for immediate sale as a single trade. For example, an investor who wants to sell off ten thousand shares of a given security would execute an order to sell those shares as a block, meaning that one buyer will purchase all the shares offered. The benefit to this approach is that the seller receives compensation from the sale in one lump sum, rather than incremental returns from multiple buyers. A possible downside of this type of huge order to sell is that it could have a detrimental effect on the marketplace, especially if the shares are sold at a discount.

A different approach to a block order is known as the iceberg order. With this approach, the owners instructs a broker or agent to sell off a massive number of shares of the same security, but to offer the shares in smaller increments over a period of time. The idea here is to sell the shares in a manner that does not lead to mass speculation about some impending issue that would undermine the worth of those shares. By selling a few of the shares of the overall block order at a time, there is much less chance of adversely affecting the market value of the shares, or creating an fears that cause some degree of chaos in the market where the shares are traded.

There are situations in which an owner may want to sell off massive numbers of shares of a given security in a short period of time. This is sometimes the case when an unforeseen financial emergency has arisen, and the owner needs an immediate influx of cash to deal with that emergency. In circumstances of this type, the owner may instruct the broker to process the block order with an asking price that is below the current market value. Doing so effectively places the shares in the market at what is known as a blockage discount.