The term block trade refers to a privately negotiated futures or option that is not executed in a public auction. Block trades must exceed pre-defined quantity thresholds in order to be executed privately.
An order can be executed using a block trade only if the customer specifies the order be executed in this manner. The order must also exceed certain pre-defined quantity thresholds, and orders cannot be combined to meet these thresholds. From a practicable standpoint, block trades are typically executed on behalf of institutional investors. A block trade that is also a Basic Trade at Index Close (BTIC) may not take place on the last day of trading for a contract. All other block trades may be executed at any time as long as the public auction is closed.
According to the CME and CBOT:
“Block trades must be transacted at prices that are “fair and reasonable” in light of (i) the size of the transaction, (ii) the prices and sizes of other transactions in the same contract at the relevant time, (iii) the prices and sizes of transactions in other relevant markets, including, without limitation, the underlying cash market or related futures markets, at the relevant time, and (iv) the circumstances of the markets or the parties to the block trade.”
Block trades must also be reported to the appropriate clearing house using a pre-approved method. All clearing members facilitating block trades are required to maintain a record of the transaction as per Rule 536.