With the increase in trading by institutional investors, trading arrangements more suitable to these investors were developed. Institutional needs included trading in large size and trading groups of stocks, both at a low commission and with low market impact. This has resulted in the evolution of special arrangements for the execution of certain types of orders commonly sought by institutional investors: (1) orders requiring the execution of a trade of a large number of shares of a given stock and (2) orders requiring the execution of trades in a large number of different stocks at as near the same time as possible. The former types of trades are called block trades; the latter are called program trades.
On the NYSE, block trades are defined as either trades of at least 10,000 shares of a given stock, or trades of shares with a market value of at least $200,000, whichever is less. Program trades involve the buying and/or selling of a large number of names simultaneously. Such trades are also called basket trades because effectively a “basket” of stocks is being traded. The NYSE defines a program trade as any trade involving the purchase or sale of a basket of at least 15 stocks with a total value of $1 million or more.
The institutional arrangement that has evolved to accommodate these two types of institutional trades is the development of a network of trading desks of the major securities firms and other institutional investors that communicate with each other by means of electronic display systems and telephones. This network is referred to as the “upstairs market.” Participants in the upstairs market play a key role by (1) providing liquidity to the market so that such institutional trades can be executed, and (2) by arbitrage activities that help to integrate the fragmented stock market.