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Suppose the national best bid for an illiquid stock is $10, and the national best ask is $12. Alice wants to buy 1,000,000 shares, but the daily volume of the stock is lower than the amount she wants to buy. She locates Bob, who is willing to sell her a large number of shares. They enter into a private agreement to transact 1,000,000 shares at a price of $9 per share. Is this allowed in the US? In other words, can off-exchange trades take place at prices (e.g. $9) outside the bid-ask spread (e.g. $10 by $12)? Or does Bob need to sell to all the displayed bids on public stock exchanges first before he can sell any shares to Alice?

If such off-exchange trades are allowed, will they be reported to the public?

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  • Off market transactions are private and can happen at any price - but why would Bob sell his shares for $5 off-market when he can sell them for $10 on market (modulo the effect on the bid chain)? – D Stanley Aug 3 '20 at 12:39
  • @DStanley I've edited the question to make things clearer. – Flux Aug 3 '20 at 15:01
  • Post edit: Echoing what @D Stanley asked, why would Bob sell shares to Alice for $9 when he could sell them to Ted or Carol at $10 which is the market price? – Bob Baerker Sep 2 '20 at 16:09
  • @BobBaerker Since the stock is illiquid, Bob may accept the lower price if he wants to sell a large number of shares in one transaction (instead of selling over several days or weeks). – Flux Sep 2 '20 at 16:22
  • Bob isn't very bright if he accepts $9 instead of the $10 market price, tossing away one million dollars nor is he very bright for not trying to get a fill within the $2 spread. He could place an iceberg order to disguise his intentions and see what's out there. And he could utilize an investment banker to try to locate a better counter party offer. It's a bit preposterous in that this is an illiquid stock and Alice wants 1,000,000 shares but continuing with preposterous, the stock offers options. Buy the cheapest $10 puts for less than a dollar and exercise them to sell at the strike. – Bob Baerker Sep 2 '20 at 16:38
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Yes this is allowed. In fact it is "normal" for huge block trades. (I created algorithmic trading systems for many companies in the US - I will give you an example).

Let's take a look at the info you provided - a spread of 10-12. First that doesn't really exist. Sure you may see something like that after hours or during super low volume times but stocks do not trade with a ~20% spread.

Second given the spread and the need to BUY a large block this buyer would jump at $10. The $9 price would never happen. Nobody is executing at $10 so it is basically someone gifting another person well over a million dollars. If a large block was advertised for a company (not sure how many shares this company has but you said daily volume below 1m) there would surely be some market makers looking to unload at profit - given the spread, low volume, this could be ANYWHERE between $10-12 and probably highly influenced by trade history. But what you would see is the market makers maybe starting at $12 or a little before. They would certainly start breaking that block of 1m up and push it up in increments until they start getting takers.

That is why you see large blocks sold off market sometimes - it is a game of cat and mouse. If the cat says I will pay $11 for 50k shares and only one market maker comes forward... Well the next 50k shares may be $11.25 and so on until there is more competition. A smart firm may look at their holdings or look at the holdings of the company and see... well if they want to buy 1m shares total they will probably need a lot of ours... let's put ares up for $13 a share until we start seeing them fill more.

So this is why companies go off exchange for large blocks - it is the only way to negotiate a price. On exchange for something low volume there will probably never be a market maker with 1m shares - why would they offer that unless it was a huge price? Going off exchange enables negotiation without showing the world your hand - most off exchange negotiations are confidential and there are even tools used in the financial markets to make these deals. The firms making these deals value anonymity and breaking it would severely damage their reputation.

The trades are made public - once they are negotiated, contracts signed and money/shares exchanged. (Sometimes large blocks could be put in a buffer/offer pool between the companies based on other consideration. If this is the case it would not be public because the transaction hasn't been fulfilled although there are SEC guidelines). An example is if I need 10m shares to start a takeover of said company and I negotiate to but 1m shares at XYZ date at a given price. I may not want to execute now() because I would be showing my hand for the other 9m shares.

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Yes they can. Very often those are large block trades and arrangement and the paperwork may take some time. Then the recorded trade is only that - a record. Which AGAIN may take time to be processed. So, as the price is possibly agreed days earlier, and the reporting ma happen a day later... where do you get the idea bid and ask are not possibly moved in this timeframe?

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