A block trade is the sale of a large parcel of listed shares in one negotiated transaction, away from the normal flow of the order book. It exists because a big shareholder cannot simply sell a big stake into the market: the stake is usually worth many times the stock's daily turnover, and trying to unload it openly would drive the price down long before the seller was finished. Instead, the seller goes to an investment bank, and the bank places the shares with institutional investors overnight — at a discount to the last closing price. The two dominant formats are the accelerated bookbuild (ABB), where the bank builds a book of demand and the seller only learns the clearing price in the morning, and the bought deal, where the bank buys the whole block itself at a fixed price and takes the resale risk onto its own balance sheet.
This article explains what block trades are, why the placement discount exists, how the three main execution routes differ, and which type of seller typically picks which. If you want to work through the economics with actual numbers, the companion case Block Trade vs. Accelerated Bookbuild takes a sponsor's 22% stake through all three routes and compares net proceeds side by side.
What a block trade actually is
In equity capital markets language, a "block" is any parcel of shares large enough that it cannot be traded normally without disturbing the price. There is no legal threshold. In practice, desks think in multiples of average daily trading volume (ADV): if the stake represents more than roughly ten to fifteen days of the stock's normal turnover, it is block territory, and the seller needs a placement rather than a series of market orders.
Two features distinguish a block trade from ordinary secondary market trading. The first is that no new shares are created. In a block trade, existing shares change hands from one holder to another, so the company itself receives nothing and the share count is unchanged. That makes a block a secondary share placement, not a capital raise, and it is why block trades are not dilutive in the arithmetic sense — a point that trips up candidates who assume every equity transaction dilutes earnings per share. If you want the contrast, a rights issue does create new shares, and the dilution mechanics there are genuinely different.
The second feature is that the price is set by negotiation and by a compressed bookbuilding process, not by the exchange. The bank contacts institutional investors, takes orders at various price levels, and strikes a clearing price. The whole exercise typically runs from the moment the market closes to the moment it reopens.
The three routes a large stake can take
The fully marketed secondary offering
The slowest and, in fee-and-discount terms, usually the cheapest route. The seller and the banks prepare a prospectus or offering document, hold a roadshow, and market the shares to investors over several weeks before pricing. Because demand is built properly and the story has been explained, the eventual discount to the market price is narrow — frequently in the 2% to 4% range for a liquid large-cap.
The cost is time and exposure. For four weeks the seller is publicly known to be selling, the share price can drift, and the deal can be repriced or pulled if markets turn. Underwriting fees are also the highest of the three routes, commonly 2% to 3%, because the banks are doing genuine distribution work and, under a firm-commitment structure, carrying contingent liability for weeks. This route resembles the mechanics of a full IPO process compressed into a shorter timetable, and much of the documentation and diligence burden carries over.
The accelerated bookbuild (ABB)
The workhorse of European equity capital markets. The seller mandates one or more bookrunners after the market closes; the banks contact institutional accounts through the evening, take orders, and price the deal before the market reopens. Nothing is marketed publicly beforehand, and the announcement and the pricing land within hours of each other.
Because investors are being asked to commit capital with almost no time to analyse, the discount widens — typically 3% to 8% depending on the stock's liquidity, the size relative to ADV, and how the market has been trading. Fees, by contrast, fall, usually to somewhere between 0.75% and 1.5%, because the bank's work is one night of order-taking against a known buyer list rather than weeks of roadshow.
The crucial nuance is that in a standard ABB the bank is acting on a best-efforts or partially underwritten basis. The seller does not know the clearing price until the book closes. If the book is thin, the price comes at the wide end of the range, the deal is downsized, or it is pulled altogether. Speed removes weeks of market risk, but it does not by itself deliver price certainty.
The bought deal (block trade in the strict sense)
Here the bank does not distribute on the seller's behalf; it buys. In a bought deal the bank agrees a fixed price for the entire parcel, signs, and the seller's involvement ends. The bank then owns the block and attempts to resell it, often through an ABB the same night, keeping whatever it can achieve above its purchase price.
Two consequences follow. First, the discount is the widest of the three routes, commonly 6% to 10% or more, because the bank is pricing in the risk of not being able to place the stock. Second, there is usually no separate underwriting fee at all — the bank's entire economics sit in the spread between what it paid and what it resells at. Candidates who look at a bought deal and conclude it is "fee-free, therefore cheapest" have missed where the cost has moved.
Bought deals are the tool of choice when the seller values certainty above everything: the price is locked at signing, and if the stock gaps down on the announcement, that is the bank's loss, not the seller's.
Comparing the three routes at a glance
| Dimension | Fully marketed | Accelerated bookbuild | Bought deal |
|---|---|---|---|
| Typical timetable | 2–6 weeks | Overnight | Same evening |
| Typical discount to last close | 2%–4% | 3%–8% | 6%–10%+ |
| Typical underwriting fee | 2%–3% | 0.75%–1.5% | None (bank earns the spread) |
| Who carries market risk | Seller, for weeks | Seller, until books close | Bank, from signing |
| Price certainty for the seller | Low | Medium | Full |
| Leak and signalling risk | High | Low | Lowest |
| Documentation | Prospectus, roadshow | Term sheet, wall-crossing | Purchase agreement |
Read the table as a single trade-off rather than three separate ones: every step towards speed and certainty is paid for in basis points of discount, and every step towards a narrow discount is paid for in time on risk.
Why the placement discount exists at all
The instinctive objection to any block trade is that the buyer is getting the shares below market, so the seller is destroying value. That misreads what the market price represents. A quoted share price is the price at which the marginal share trades. It says nothing about the price at which several hundred million euros of stock would clear.
Three separate frictions justify the discount:
- Liquidity. The block has to be absorbed by investors who were not planning to buy that day, in a size that will take them weeks to trade out of if they change their minds. They price that illiquidity into their bid.
- Information asymmetry. A large, informed holder selling is, on its face, a bearish signal. The discount compensates the buyer for the possibility that the seller knows something.
- Overhang. Once a placement is announced, the market knows a large amount of stock has moved into weaker hands, and the technical picture worsens until the new holders settle.
The clearest way to feel the force of the liquidity argument is to compute the ADV multiple. A stake worth fifty times daily volume simply cannot be sold in the market. In the worked example in the block trade case study, a 44.0m-share stake against 0.8m shares of daily volume works out at 55.0x ADV, and a disciplined drip-feed at 20% of daily volume would take about 275 trading days. Against that alternative, an 8% one-off discount is cheap.
Who uses which route
Financial sponsors
Private equity funds are the single largest source of block trade supply. A sponsor that took a company public two years ago is now selling down a residual stake, usually against a fund life that is running out and limited partners who want distributions. Sponsors have no long-term relationship with the shareholder register to protect and no need to explain a strategic story, so they optimise for certainty and speed. That makes ABBs and bought deals their natural tools. The same logic explains why sponsors are comfortable with other liquidity-first structures such as a dividend recapitalisation or a secondary buyout when a public exit is unattractive.
Corporates divesting a listed stake
A corporate holding shares in a former subsidiary or a legacy cross-holding usually has no deadline. It also has a reputation with its own investors to manage, and a messy placement invites questions. Corporates therefore lean towards the fully marketed route, or towards staged sell-downs where a first tranche is placed and the rest follows after a lock-up. Where the asset is large enough, the decision may not be "which placement format" but "placement or sale", which is the classic dual-track question.
Governments and state holdings
Public sellers face a particular problem: they are accountable for the price they achieved, and they cannot afford the accusation that they leaked the trade. Bought deals and tightly wall-crossed ABBs are common for exactly that reason, and the fixed price of a bought deal is defensible after the fact in a way that a book that priced badly is not.
Founders and management
Founder sell-downs are the most signalling-sensitive of all, which is why they are usually small relative to the free float, pre-announced, and accompanied by a lock-up on the remaining holding. The mechanics are the same, but the communication matters more than the basis points.
Wall-crossing, leaks and confidentiality
Because a block trade is priced off the last close, anything that moves the price before launch destroys value. The process is therefore built around confidentiality. Before launch, the bookrunner may "wall-cross" a handful of large investors: it brings them inside on the confidential information, in exchange for their agreement not to trade until the deal is announced. A wall-crossed anchor order gives the desk confidence that the book will cover, and lets it price tighter.
The risk is symmetric. Every additional investor brought over the wall is another potential leak, and a leaked block typically sees the stock drift down before launch, so the discount is struck off a lower base. Desks trade off certainty of coverage against leakage risk, and that judgement is a large part of what the seller is paying for.
What happens after the trade
The placement is not the end of the story. Three mechanisms shape the aftermath:
- Lock-ups. The seller normally signs a 90 or 180-day lock-up on any retained shares, so the market knows no further supply is coming immediately. Without one, the residual stake is a permanent overhang.
- Free float and index effects. A block moving from a strategic holder into institutional hands increases the free float, which can raise the stock's index weighting and bring in passive demand. This is the same free-float arithmetic that matters at the IPO stage, covered in how to calculate IPO deal size, greenshoe and free float.
- Aftermarket trading. Unlike an IPO, a block trade has no greenshoe or stabilisation mechanism behind it. Once the shares are placed, the price finds its own level, which is why the initial discount has to be wide enough to leave buyers with room.
How a block trade differs from the other ECM tools
Candidates often blur the equity capital markets toolkit into one category. The distinctions are worth holding clearly:
- A block trade sells existing shares from one holder to another. No new capital, no dilution, company receives nothing.
- A rights issue creates new shares and offers them to existing shareholders pro rata, at a deep discount, with a theoretical ex-rights price to compute. See what a rights issue and TERP actually mean.
- An IPO creates a public market for the first time and can involve both new (primary) and existing (secondary) shares; see IPO pricing and stabilisation.
- A convertible bond raises debt today with potential equity dilution later, which is why issuers use it when they think the stock is undervalued — explained in the convertible bond guide.
Only the block trade leaves the share count untouched. That is the single fastest way to distinguish it in an interview.
Three misconceptions worth unlearning
"The bought deal is free because there is no fee." The fee has not disappeared; it has been converted into a wider discount and moved into the bank's trading spread. Add the discount and the fee together and rank the routes on all-in cost, and the bought deal is normally the most expensive.
"A block trade dilutes shareholders." It does not change the share count, so earnings per share is unchanged. What changes is the register and the technical supply picture. Genuine dilution arithmetic belongs to rights issues, convertibles and option pools, covered in basic versus diluted share count.
"An ABB is risk-free because it is overnight." Overnight removes weeks of exposure, not the exposure itself. In a best-efforts ABB the seller finds out the price after the fact, and a book that fails to cover can be pulled — leaving the seller with the stake, a damaged stock and a public signal that it wants out.
Frequently asked questions
How big does a stake have to be to need a block trade?
There is no fixed threshold; the practical test is the ADV multiple. Anything much beyond ten to fifteen days of average daily trading volume is normally placed rather than traded, and stakes at fifty times ADV or more have essentially no market alternative.
Does the company get any of the money?
No. In a pure secondary block the proceeds go to the selling shareholder. Companies sometimes attach a small primary tranche to a sell-down, in which case that portion is a capital raise and is dilutive, but the two components are priced and disclosed separately.
Why would a bank agree to a bought deal at all?
Because the discount compensates it. The bank is effectively selling insurance against execution risk, and pricing that insurance is its core competence. Banks also compete for bought deals to win league table credit and future mandates from the seller, which occasionally leads to aggressive bids and, when the market moves against them, losses.
Are block trade discounts wider in a falling market?
Yes, materially. Investor appetite for unexpected supply falls exactly when volatility rises, so discounts widen and books cover less comfortably. This is the same dynamic visible in credit, where spreads gap out in stress; the parallel is drawn in high yield versus investment grade bonds.
Where to go next
The concepts here become much sharper once you have priced a block yourself. The Block Trade vs. Accelerated Bookbuild case study gives you the stake, the ADV, and the indicative terms for all three routes, and asks you to compute net proceeds and all-in cost. The applied walkthrough in how to answer a block trade versus accelerated bookbuild question in an ECM interview then shows the structure a strong answer follows under time pressure.