Bagging the Street

WHAT IS Bagging the Street?

Bagging the street is a term that refers to an investing strategy that chases profit immediately prior to the execution of large-volume trades.

How Bagging the Street Works

Bagging the street is a strategy an investor may choose to employ when they see a large block trade take place. If an investor anticipates a large block trade and that investor trades securities in the same stock, the investor may attempt to benefit from the impact the large block trade may have on the price of stock. This attempt is called bagging the street. Some in the industry see this as an unfair advantage which can help traders who take advantage of information imbalances. Traders who frequently practice bagging the street may also have their margin requirements revoked by a brokerage.

In order to bag the street a block trade must take place. Block trades entail a large volume of stocks and can have an impact on the price of shares underlying the block, especially if those securities are illiquid. Traders who practice bagging the street attempt to gain an advantage from the block trade if it is large enough to impact stock prices. Once the block trade fully goes through and the market quickly absorbs the impacts, investors are free to resume their desired trading strategies.

An Example of How an Investor Bags the Street

Because blocks are large, individual investors rarely purchase them. Instead, they appeal to larger institutions or funds. Though there is no official size designation, the common standard is 10,000 equity shares or a total market value of more than $200,000.

For example, let’s say Institution A wants to purchase 50,000 shares of Company A, and goes ahead and places that purchase order with its broker. That broker then goes to fill the order, but to do that they have to acquire a large number of shares from various sellers, which increases the demand for Company A’s shares. The increase in demand increases the price of each share and each share goes from $10 to $15 a share. A trader, wishing to capitalize on this, would see the order for the block trade go to the exchange and, knowing that it will likely take a longer time to fill the order, the investor would place smaller orders at the current share price of $10, as the smaller orders will be filled more quickly. The trader then turns around and sells the shares at the new price of $15 a share.