Since you ask...

Here we explain baffling stock market terminology – and how you might stand to profit. This week : Block trades

WHAT ARE THESE?

A BLOCK trade is the sale of a large number of shares in a company that’s been arranged privately rather than through the public markets. an investment bank acts for the seller. the Wall Street giant Goldman Sachs pioneered these deals in the 1960s.

HOW DO THEY WORK?

THE bank acquires the shares at a small discount from the seller – who may be the founder of the company, or an investor, such as a hedge or private equity fund. the bank divides up the shares and sells them to other investors, also at a small discount.

in advance of the transaction, the bank may have ‘hypothetical’ conversations with clients to gauge interest in the block trade to minimise ‘fade’, that is a decline in the share price before the block trade is completed. But discretion is supposed to be key to this activity: a block trade needs to be executed quietly and swiftly.

WHY ARE DEALS DONE PRIVATELY?

A BLOCK trade can move markets, potentially causing the share price to tumble. More such deals are being done because more firms are waiting longer to list their shares on an exchange. Meanwhile, they allocate shares to managers and venture capital firms which they will be allowed to sell after a post-flotation lock-up period. a block trade should allow these shareholders to cash in their stakes at a decent profit.

DO THE AUTHORITIES APPROVE?

NOT necessarily. Last week the US giant Morgan Stanley agreed to pay $249m to settle a long-running Securities and Exchange commission (SEC) probe into its block trading division. this arm of the bank is the busiest block-trade department in Wall Street, the envy of its peers, apparently. Block trades are an extremely lucrative business, with at least $70bn-worth transacted in a year.

One of the bosses at the Morgan Stanley block-trade division had been leaking confidential details on deals to third parties who used this information to position their portfolios ahead of the block trades.

These third parties included one Londonbased hedge fund.

DID ONE TRADE RAISE EYEBROWS?

MORGAN Stanley’s competitors are reported to have highlighted an august 2022 deal involving a block trade in the shares of video- conferencing platform Zoominfo technologies.

Before the sale, the share price tumbled, suggesting that the transaction had not remained a closely-kept secret.

DID MORGAN STANLEY MAKE MONEY ON THE SIDE FROM THE LEAKS?

THE leaks are reported to have earned the bank about $100m in what the SEC calls ‘illicit profits’.

it seems that the recipients of the information would short the shares, that is, sell them in the hope that the price would fall.

to complete this transaction, they would then buy a parcel of shares from Morgan Stanley from which the bank would earn commissions.

WHO ARE THE OTHER BIG NAMES IN THE BLOCK-TRADE WORLD?

SIMON Sadler, the owner of Blackpool football club, is seen as the biggest player in the asian block trade sector.

He is the boss of the $6bn hedge fund Segantii capital.