Block Trading Facility (BTF): What it is, How it Works, Example

What Is a Block Trading Facility (BTF)?

A block trading facility (BTF), offered by some stock and derivatives exchanges, allows counterparties to a large trade bilaterally agree to have that traded executed outside of public order books in order to avoid an outlier price point that might inadvertently affect that security's market price.

A block trade is a single order for a very large number of securities. Block trades are done outside of the open markets through BTFs in order to lessen the impact on the security's price.

Understanding Block Trading Facilities

Transactions in a block trading facility are conducted between two parties, with prices already set with certainty, and execution is done without delay. Institutional investors use block trading facilities for transactions involving large numbers of securities.

When shares are traded in a block trading facility, they are transacted in large lots. The size of the lots can vary, but traders are generally not permitted to aggregate multiple, separate orders in an effort to meet minimum volume requirements. Securities traded through a block trading facility are less subject to market fluctuations because they are not visible on the exchange's public order books, making this sort of trade more like a private contract between two parties.

A block trading facility is usually effected through a specialized brokerage that deals in block trades, known as a block house. Clients may range from corporations and banks to insurance firms and academic funds. Some investors and analysts try to follow the money or stay ahead of market trends by watching block trade activity. 

Because they are not settled on public order books, block trades are less likely to cause major price swings. However, because of the nature of block trading facilities, block trading activity can have a considerable effect on the financial markets. Block trades must be reported promptly to the block trading facility, and trading data is usually published alongside daily exchange volume.

Process Followed in Block Trading Facilities

Block trades are done off-exchange by necessity. A very large order to buy or sell a particular stock will, however inadvertently, disrupt trading and artificially inflate (or deflate) its market price. When a large institution decides to initiate a block trade, it will reach out to a block house or directly to the staff of an exchanges block trading facility.

Once the block order is placed, other brokers who specialize in the specific type of security being traded will try to fill the large order by accumulating several smaller sellers. Large orders may thus be broken down into smaller pieces, allowing one institutional buyer to settle orders on behalf of many clients at once.

For example, if Bank of America wants to initiate a block trade of 1,000,000 shares at $10 a share, it will contact a block trade facility for help. The staffers at the blockhouse break up the large trade into manageable chunks, in this case, that may result in 100 smaller blocks of 10,000 shares, at $10 a share. Each one of the blocks will be initiated with a separate broker, thus keeping market volatility low.

Example of a Block Trading Facility

Many public exchanges also maintain block trading facilities for large clients. The Block Trading Facility of the Australian Securities Exchange traded over 19 million contracts in 2023, according to the exchange's reports. While these trades are settled outside of the ASX's order books, they are still reported along with the rest of the exchange's market data.

NASDAQ, the world's second-largest stock exchange, also has a BTF called NASDAQ Private Markets. This specialized marketplace, geared towards accredited and institutional traders, reported trades worth $28 billion in the first three months of 2022 and $203 billion by the end of the year.