What is an Exchange Distribution?

An exchange distribution is a type of securities trading. A stockbroker representing different investors combines their buy and sell orders together. Sell orders are matched with the buy orders. All of the trading orders are then executed in a single trade on the securities exchange floor.

The buyers participating in an exchange distribution enjoy the benefit of not paying a commission to the broker. The broker who executes an exchange distribution receives a special commission from the seller. The broker is still fully compensated since there is a large number of shares being traded.

After the trade is completed, it is announced on the broad tape as an exchange distribution. The broad tape is an enlargement of the Dow Jones news ticker tape. It is usually projected on a screen at brokerage firms.

The broad tape reports real time major news items and other financial information. Such information would give securities exchange floor traders an unfair advantage. As a result, the broad tape is not allowed on the exchange floor.

Two related types of securities trading are exchange acquisitions and special bid transactions. In an exchange acquisition, the stockbroker starts with a large buy order from a single investor. The broker then solicits orders from different sellers to fill the large buy order. All of the sell orders are then executed as a single transaction. The buyer is usually an institutional investor, such as a large company.

In a special bid transaction, the broker pools together different sell orders. All of the stock is offered together at a fixed price. The buyer can be either a large institutional investor, or a group of smaller investors.

The fixed price is announced in advance on the consolidated tape. The consolidated tape records all securities transactions including sales volume and price. The tape includes information from all securities exchanges. Unlike the broad tape, the consolidated tape can be displayed on the stock exchange floor.

The fixed price cannot be lower than the last sale or current market bid. Sellers of the stock do not pay the broker a commission when a special bid is used. The buyer pays both the buying and selling commissions. Special bid transactions are completed during regular trading hours.

Special bid transactions, exchange distributions, and exchange acquisitions can affect the market price of a security. This is due to the large volume of shares being traded at once. The effect these block trades have on market price can depend on market liquidity and investor demand for the securities being traded.