Negotiated trade

A negotiated trade is concluded not in the anonymous order queue but directly between participants who have agreed on the terms in advance: the order in the trading system is addressed to a specific counterparty and is visible only to that counterparty. Here the exchange acts not as a meeting place for random orders but as the infrastructure that registers and settles a trade the parties have already agreed.

How the negotiated mode works

In the main trading mode an order goes into the common order book and is executed against any matching offer according to price and time priority; the state of demand there is read through market depth. A negotiated order never enters the order book at all. The participant specifies the counterparty's code, the security, the volume, the price and the settlement period, and the other side confirms with a matching negotiated order carrying the same parameters. If they match, the trade is concluded; if they do not, it simply does not take place: there is no partial execution "at the best price" here.

The settlement date is agreed separately: the negotiated mode allows not only the standard settlement day but also deferred settlement, which is why transfers of large stakes, repo transactions and operations between affiliated parties go through it. The trade nonetheless remains an exchange trade: the parties' obligations are closed out through clearing, and the securities are transferred through a depository, so counterparty risk is removed by the infrastructure rather than by trust between the participants.

Example: which price the security's card shows

The price and turnover on the card are compiled from trades in the main mode, those that passed through the order book. A negotiated trade in the same security on the same day may be concluded at a noticeably different price, but it will not move the quote and will not enter the calculation of the main mode's VWAP. In the time and sales feed, negotiated trades appear with a separate mode flag, and it is precisely by this flag that they are separated out when market turnover is calculated.

What gets confused with what

The term "negotiated" describes the way a trade is concluded, not its size or its corporate status. A block trade is about a volume that cannot fit into the order book without moving the price. A cross trade is about a situation in which one broker stands on both sides. A major transaction is a corporate-law term altogether, concerning the need for approval by the company's governing bodies. These features can coincide in a single operation, but none of them follows from a trade being negotiated.

The second mix-up is to treat a negotiated trade as an off-exchange one. It is concluded on the exchange, under its rules and with its clearing, whereas the over-the-counter market means the absence of this entire framework.