The Impact of Large Orders in Electronic Markets

43 Pages Posted: 16 Aug 2014 Last revised: 7 Oct 2018

See all articles by Luisella Bosetti

Luisella Bosetti

Borsa Italiana S.p.A.

Pietro Gottardo

University of Pavia - Department of Business Research

Maurizio Murgia

Free University of Bolzano-Bozen Faculty of Economics and Management

Andrea Pinna

Free University of Bolzano-Bozen Faculty of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 17, 2014

Abstract

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

Bosetti, Luisella and Gottardo, Pietro and Murgia, Maurizio and Pinna, Andrea, The Impact of Large Orders in Electronic Markets (November 17, 2014). 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: https://ssrn.com/abstract=2480954 or http://dx.doi.org/10.2139/ssrn.2480954

Luisella Bosetti

Borsa Italiana S.p.A. ( email )

Italy

Pietro Gottardo

University of Pavia - Department of Business Research ( email )

Italy

Maurizio Murgia (Contact Author)

Free University of Bolzano-Bozen Faculty of Economics and Management ( email )

Piazza Universita' 1
Bolzano-Bozen, Bolzano 39100
Italy
+390471013110 (Phone)
+390471013009 (Fax)

HOME PAGE: http://www.unibz.it/academicstaff/mmurgia

Andrea Pinna

Free University of Bolzano-Bozen Faculty of Economics and Management ( email )

Piazza Universita' 1
Bolzano-Bozen, Bolzano 39100
Italy
+390471013297 (Phone)
+390471013009 (Fax)

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