Selling small amounts of publicly listed shares is easy: They generally sell for the prevailing market price. Big share sales are more complicated, since the very act of selling can drive the price down. To avoid that scenario, banks and brokerages often work with sellers to arrange private “block trades.” A string of recent scandals has underscored the murkier aspects of block trading, and put pressure on regulators to crack down on the misuse of private information ahead of deals.
What is the point of block trades?
It can take several days to liquidate a large stock holding on exchanges, and market prices can fluctuate a lot over that period. If the trading community realises that a big sale is in the works, the price is likely to fall, limiting the gain for the seller before the trade has even happened. So sellers prefer to negotiate deals away from the public eye, usually at a small discount to the market price. This allows them to lock in a single price for all the shares they want to offload.
How long has block trading been around?
Block trading was conceived more than a half century ago and has grown to become a major business on Wall Street. Legendary Goldman Sachs Group Inc dealmaker Gus Levy used block trading in the 1960s to help position his firm to become the financial powerhouse that it is today.

In an era of anonymised, electronic trading, block trades are one of the few areas of finance where investment banks’ relationships still drive the flow of deals, with the terms hashed out by humans on phones and keyboards.
Who is involved in block trades?
Sellers can include company founders and their families, asset managers and other big shareholders such as pension funds, insurance companies and private equity firms. Banks and brokerages act as intermediaries by receiving blocks of shares and selling them on. Typical buyers are hedge funds, mutual funds, family offices and other institutional investors.
How are block trades done?
Block trades are usually completed in a matter of days, and sometimes in less than 24 hours. Speedier deals are more common in equity markets in Asia and Europe than in the US.

In many instances, investment banks first purchase shares of a company from the seller before offering them to buyers, and pocket the difference in price. On other occasions, banks representing a seller may line up potential buyers first, then facilitate the sale at a price that both sides agree upon — and collect a commission. This limits the risk that the bank or brokerage involved will make a loss on the sale. Some banks have been known to guarantee sellers a minimum price to make sure they are hired to handle a deal, and share any additional gains with them.

Banks sometimes send out so-called term sheets to potential institutional buyers with details such as the number of shares on offer and an indicative price range. Alternatively, they may contact a small group of potential buyers directly to gauge their interest in a block of shares and what they are willing to pay for them.

Banks handling non-public information around a block trade have to guard it carefully, as leaks could cause market prices to drop before sales are completed.

The banks commonly try to test investor appetite by providing vague information about a planned trade. Interested parties usually have to pledge not to act upon that information for any purpose except that specific trade, in a process known as “wall-crossing”. This usually affects only a small number of potential buyers.

Some sellers instruct their bankers to avoid wall-crossing, so the bankers have to use their own judgment when deciding the price range and terms of a sale.
How are block trades tracked?
Bloomberg LP and other financial information providers have block-trade monitors that capture deals reported in corporate filings or term sheets from investment banks. Block trades of a certain size are also disclosed through stock exchanges after they are completed. In Hong Kong, the requirement applies to any changes in holdings of shareholders owning more than 5% of a company.

Often, key shareholders of recently listed companies are subject to lockups that prevent them from selling the shares for at least six months after a public offering. When those selling moratoriums — which are publicly disclosed in regulatory filings — expire, block trades can take place. Investment banks pitching for business and funds active in the share sale markets keep a close eye on those lockups in the expectation that block trades may follow.
What are regulators worried about?
By sounding out potential investors to gauge demand, a process known as “market sounding,” bankers can determine optimal pricing and offer sizes for upcoming stock sales. These conversations are supposed to be vague and not specific enough to enable investment funds to glean information about deals that are coming to market.

But that can be tricky if a listed company has a relatively unique business and savvy investors receiving the information can make educated guesses about upcoming deals.

There has long been suspicion that some traders and bankers tip off their best investor clients to impending block trades, enabling hedge funds to make well-timed bets on stock prices and profiting handsomely as a result.

Market participants have long complained about stock-price declines that preceded block trades, which suggested that material non-public information was being leaked. They say this creates an uneven playing field that benefits some investors at the expense of others.
What are regulators doing?
Morgan Stanley agreed in early 2024 to pay $249mn to settle years-long probes by the US Department of Justice and the Securities and Exchange Commission into how it handled confidential information ahead of block trades. The bank acknowledged that two of its employees violated the firm’s policies and has taken steps to strengthen its internal procedures and surveillance. One of the employees has been charged with securities fraud in a US federal court.

Hong Kong’s Securities and Futures Commission last year launched a public consultation on proposed market-sounding guidelines that would apply to brokers and investors licensed in the city. It recommended that market soundings involving non-public information should take place only on authorised recorded communication channels. Both sides should keep audio, video and text records for no less than seven years. The final guidelines have yet to be published, but have received push-back from hedge funds, which complained that the measures could impose an undue compliance burden on them.

In early May, the SFC said it had started criminal proceedings against Segantii Capital Management, its founder Simon Sadler and a former trader, Daniel La Rocca. It said the hedge fund illegally traded shares of a company listed in the city prior to a block trade in 2017. Segantii said it intended to fight the insider trading charges.