A block trade is a single large trade in excess of a specific volume and/or a specific market value. The definition of a block trade varies across different financial products. For instance, on the equities market, a block trade has traditionally been defined as a trade of 10,000 shares or more or a trade with a total market value of at least $200,000. In contrast, a block trade on the options market has traditionally been defined as a trade of 500 contracts or more, with a total market value of at least $150,000.
Many studies have been conducted on the impact of large block trades on prices in the marketplace, especially as relates to the equities market. Because block trades are perceived to indicate the trading strategies of large institutional investors, market participants often monitor block trades to determine if the market in a given issue is becoming increasingly bearish or bullish. When the price of a block trade is higher than the best offer in the market at the time, market participants typically interpret this to mean the market direction is moving upward for this issue. Similarly, when the price of a block trade is lower than the best bid at the time, market participants typically interpret this to mean the market direction is moving downward for this issue. The execution of a block trade at a price outside the quotes is deemed so important that some trading workstation systems are configured to automatically trigger an actionable alert every time a block trade executed outside the quotes is detected.
On some markets, block trades outside the quotes are allowed, but only under certain conditions. If no such exception condition exists and a block trade executes outside of the quotes, the offending market center “owes a fill” to the market center that had the better price at the time the block trade was reported to the marketplace. The “satisfaction fill” is typically executed in the following manner. The market center whose quote was traded-through (“the aggrieved market center”) generally sends an electronic message (or satisfaction order) to the market center that traded-through the quotes (“the offending market center”) requesting satisfaction for the orders that were traded-through. When the offending market center fulfills the request for satisfaction by sending the requested number of shares (or contracts) at the block price to the aggrieved market center, the aggrieved market center then is able to adjust the trade price of the orders that were traded-through to be equal to the price of the shares (or contracts) that were part of the block trade. In this manner, the aggrieved market participants receive the price improvement they would have received had the block trade interacted with the public order book.
While this “satisfaction fill” process protects orders that were at the top of the book when the block trade executed, it does not protect orders that were lower down in the book or that had a non-displayed component, such as a reserve order. When a block trade executes at a price worse than the best bid or offer, orders lower down in the book or ones that have a non-displayed component become subject to potential arbitrage. With respect to orders that were not at the top of the book and were not protected, other market participants, seeing these orders, may attempt to promptly execute against these orders and then turn around and trade such instruments on another market center to benefit from the spread created between the price the order was posted at and what may be perceived as the market's more ‘informed’ price, as indicated by the price of the executed block trade. Order types with a non-displayed component, such as reserve orders, are targets for possible arbitrage whether they are at the top of the book or not. Only the displayed portion of a reserve order at the top of the book is eligible for satisfaction at the block trade price. Whenever the displayed portion is depleted by trading, it is replenished at its original price, which is superior to the block trade price. Other market participants will typically attempt to execute against the reserve order at its superior price until it moves away or is depleted.
Accordingly, there is a need for a posted limit order that will reprice itself less aggressively in view of a block trade executing in that issue at a trade price that is inferior to the prices quoted on the posting market center.