The stock market is a place where shares are bought and sold by a number of participants. Besides the retail investor, there are large institutions such as investment banks, mutual funds, hedge funds, pension funds, foreign institutional investors (FIIs), high net worth individuals (HNIs), company promoters, etc. to name a few. These institutional investors and high net worth individuals come with deep pockets and detailed knowledge of companies and markets not always available to the retail investor. As a result, the trading patterns of these large investors are different from those of the retail investors. Two common types of transactions entered into by large and institutional investors are block deals and bulk deals. Though the two names sound similar, they are in fact very different in nature from each other.
A block deal is defined as a single trade in which shares greater than 5,00,000 in number or more than Rs. 10 crores in value are traded. The minimum value for a block deal used to be Rs. 5 crores but in 2017 the Securities and Exchange Board of India (SEBI) hiked it to Rs. 10 crores. Block deals are executed during a special trading window called the block deal window. Since block deals in the share market happen during a separate trading window they are not visible to the retail investor. Block deals also do not show up on the volume charts in trading platforms. Some of the rules governing block deals are:
1. Block deals may not be executed during normal trading hours but only during a special trading window known as the block deal window. This trading window operates in two shifts of 15 minutes each:
– Morning trading window from 8:45 AM to 9:00 AM.
– Afternoon trading window from 2:05 PM to 2:20 PM
2. Block deals are transacted in accordance with a Block Reference Price. Orders can be placed only with 1% ( + or -) of the Block Reference Price. The Block Reference Price is calculated differently for each of the two trading windows. For the morning trading window, it is the previous day’s closing price. For the afternoon trading window, it is the volume-weighted average price of the stock concerned between 1:45 to 2:00 PM.
3. Unmatched orders in block deals are cancelled and not carried forward into the next trading window. This means that if a block deal order placed in the morning window could not be matched, it is cancelled, and is not carried forward into the afternoon trading window.
Bulk deals are defined as a transaction involving at least 0.5% of the total listed shares of a company. Unlike block deals, bulk deals happen during normal trading hours and are visible to all market participants. They show up on the volume charts in trading platforms and dynamically influence stock prices in real-time. The broker affecting the bulk deal needs to inform the bourses about the details of the bulk deal such as the amount of the transaction, the identity participants, etc. A bulk deal can also be executed in the block trading window as long as it satisfies the conditions laid down for block trading. So for instance, if a transaction in a particular stock exceeds 0.5% of the total listed shares of the company, and is greater than Rs. 10 crores in value, the parties involved in the transaction have the option of either executing it in the block trading window or during the regular market hours as a bulk deal. In case the parties want the details of the deal to remain private until they are disclosed to the bourses, they may opt for the bulk trading windowoption.
The Impact of Bulk deals and Block deals on Prices
Bulk and block deals can be indicative of interest building up or waning in a particular stock. However, these signals need to be processed meticulously and matched with other trends and indicators to arrive at a trading decision. Mere execution of a bulk order does not necessarily mean that a particular stock is likely to move in the direction of the bulk trade. However, repeated bulk transactions in a particular direction – whether buy or sell – may be indicative of interest in the stock in the direction of the bulk trade.
Block deals and bulk deals are two kinds of market transactions used by institutional investors, large funds, and HNIs to transact large volumes in the stock market. Each has its own set of features and advantages. Whereas bulk deals are visible to everyone as they are transacted during regular market hours, block deals are transacted in a special trading window and afford a slightly greater degree of privacy to the parties concerned. However, bulk deals also need to be reported to the bourses at the end of the day and the information made available to the public. Investors can make use of data on bulk and block deals as one set of indicators in their trading strategy as they may indicate large cooperate interest in the direction of the trade. However, this data needs to be used with caution as it can often be misleading.