The Impact of Large Orders in Electronic Markets
43 Pages Posted: 16 Aug 2014 Last revised: 7 Oct 2018
Date Written: November 17, 2014
This paper uses order-level data of all investors of the Italian stock exchange Borsa Italiana (BI) to resolve three issues that remained unsettled in the extant microstructure literature: the interaction between the exchange and a parallel market for large blocks; the asymmetry between the price impacts of buy and sell orders; and the behaviour of liquidity in the limit order book around large orders. Price impacts and liquidity effects of block trades at BI are surprisingly different from existing empirical literature. Our findings reveal that price effects are much lower in the electronic downstairs market than in the upstairs market. Such result is the opposite of what can be found in previous studies. Moreover, trading costs in the central limit order book at BI are lower than in any other exchange analysed in the past. We explain that in terms of exchange trading architecture. In fact, rules on block trading at BI allowed a parallel over-the-counter market to coexist with the consolidated limit order book well before market liberalization was introduced by the MIFID directive. This left the downstairs market with a selection of liquidity-driven orders and unprecedented low price impacts.
Keywords: Large Orders, Electronic Exchange, Upstairs Market, Block Trading, Price Impact, Liquidity, Dark Pool
JEL Classification: G14, G15, G23
Suggested Citation: Suggested Citation