Blockage Discount - Explained
What is a Blockage Discount?
Written by Jason Gordon
Updated at April 17th, 2022
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Table of Contents
What is a Blockage Discount?How Does a Blockage Discount Work?Academic Research on Blockage DiscountWhat is a Blockage Discount?
A blockage discount is a term that refers to the distinction between the current price (market value) of a stock quoted on exchange and price the stock is sold at the occurrence of block trade. Block trade occurs when there is an exchange of large number of securities. Blockage discount usually occurs when large block trades occur, the institutional investors present in a block trade can negotiate blockage discount. Blockage discount shows the difference between the market value of a traded security and its sales value when in a block trade.
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How Does a Blockage Discount Work?
When traded securities have a value of over $200,000, this can be called a block trade. A block trade often involve the trade of more than 10,000 shares in the bond market. Block trades refer to exchange of large number or amount of securities. In a block trade, it is possible for depression in price to occur, often times, this is as a result of low market volume. When traders are in haste to trade off their shares of stocks in a bond market despite low market volume, there is tendency for market price to fall. To avoid depress in price, traders can give away their large securities in bits over a period of time.