Price Impact of Block Trades and Price Behavior Surrounding Block Trades in the Indian Capital Market
Posted: 25 Mar 2010
Date Written: March 16, 2010
We analyze the permanent (information effect) and temporary (liquidity effect) impact of block trades transacted in the National Stock Exchange of India. Block trades are identified using multiple criteria based on trade value and trade volume. Overall, the permanent price impact is more for block purchases than for block sales indicating that block purchases are more informative than block sales, which may be motivated by liquidity need. Unlike in other markets, we observe that the temporary impact is greater than the permanent impact in case of block purchase.
We classify the block trades as All-or-None (AON) and Not-AON trades depending on the number of transactions through which a block order is executed. As expected, the price impact is higher for Not-AON trades as compared to AON trades (which can be assumed to be pre-negotiated trades). The market may be discounting the fact that AON trades, which are simultaneous purchase and sale of large blocks, may be motivated by factors other than arrival of private information. Further, arrival of multiple block trades increases market confidence on the information. The permanent price impact is higher for days where there are more than one block trades of similar nature than for days with only one block trade.
To analyze the speed of market response to the information associated with block trades, we have used the ‘transaction time event approach’, as used by Holthausen et al. (1990). We find that the prices start increasing (front running) 10 minutes before block purchases but not in case of block sales i.e. some information about the impending block purchase is factored in by the market when the block trade is for purchases. It is also observed that in case of block sales, prices reverts quickly leaving very small permanent price impact.
Keywords: Block Trades, Market Microstructure, All-or-None Trades
JEL Classification: G12, G15
Suggested Citation: Suggested Citation