The government just decided to launch an in-depth investigation of financial institutions for their block trading practices, which is funny because… they’ve been doing it for half a century. 🙄 And retail investors have been calling on the SEC to probe block trading for years.
Block trading has been around since the 1960s. The practice allows institutions to receive a large number of shares (a ‘block’) of a stock directly from a company. The institution then subtly distributes shares from the block to select investors at a premium, which keeps the share price up and prevents the market from figuring out what’s going on. 💀 This kind of transaction is especially prevalent in Silicon Valley and among new ventures.
But wait, there’s more. Banks participating in block sales send out lists of available shares to families and hedge funds without a public mandate. This is the part of block trading that’s illegal, but difficult to catch because it can be accomplished in such a way that makes it a legal ‘gray area.’ Block sales are a huge problem because they can cause stock prices to plunge, and they allow elites access to high-profile IPOs before anyone else.
Both the SEC and the Justice Dept. are probing Morgan Stanley and Goldman Sachs for block trading, claiming that it’s possible that these two banks provided insider info to hedge funds. 🔎 We’ll be keeping up with this investigation.