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December 1, 2023

Being a block positioner for a client can be challenging and expensive

Who are the block positioners?

Block positioners are dealers who also take positions for their accounts that can help them generate profits. They do this to help facilitate a massive purchase or sale from customers that can disrupt the market. Block positions have been playing their roles for a time now. Before, prime brokers used to be block positioners, and they were willing to commit capital to their clients like hedge funds. As we have mentioned, this is to facilitate block trades for clients. However, broker-dealers have also made an effort to execute block trades.

What are block trades?

Block trades are also popular as block orders. They are massive orders in the underlying stock or bond that a client may find to execute in its totality. Their massiveness has the potential to move the market. Traders who sense this block order may try to front-run the sale. Front running is prohibited and unethical because it would hurt the firm handling that block. If there are block trades on the open market, traders should be aware of the caution they demand. The conductors are usually intermediaries like block positions instead of hedge funds or investment banks.

Who are the different block positioners?

There are different kinds of block positioners, and today, we will enumerate and talk about them for a bit:

  • IDB or interdealer broker. This broker may be a part of an agency that tries to create a group of counterparties willing to participate in a trade portion without a promised capital. This is very common in the options market, where traders try to buy and sell massive contracts.
  • Prime broker. We mentioned this earlier, and they can be willing to take the trade in a single shot. Dark pools and ECN matching systems can also be the execution location since the trades can be massive and disrupt the regular market activity.
  • Specialized block positioners or wholesale brokers. Prime brokers can ask for specialized block positions on a stock exchange floor to cross those massive stock shares at a predetermined price. This price is not similar to the current market price. They will usually work on away exchanges.

Who regulates block positioners?

With everything we mentioned, we realize that block positioners should be willing to carry significant risks to generate the profits they aim for. If you want to be a block positioner, here is a checklist of the things you need to do:

  • Register. You need to be registered with the SEC and the NYSE if it is a member firm.
  • Comply with Rule 15C3-1. Market makers need to have at least $1 million available capital because it is the minimum.
  • Buy or sell blocks. You should buy a block from a customer with a $200,000 current market value or more. Or else, you can also sell a block of the same amount. You need to do this to facilitate a sale or purchase.
  • Sell quickly. You need to look for a way to sell shares that comprise the block as fast as possible to meet all the conditions that the regulatory board set before selling the block.

It’s not that easy to be a block positioner.

Dealers know the security risk that comes with clearing the trade for the seller. Block dealers need to unload the position as fast as possible while using hedging strategies like arbitrage techniques or options. They do this to lessen the risks that come with the positions.

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