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The Impact of Large Orders in Electronic Markets

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  • Luisella Bosetti

    () (Borsa Italiana, London Stock Exchange Group)

  • Pietro Gottardo

    () (University of Pavia, Department of Economics and Management)

  • Maurizio Murgia

    () (Free University of Bolzano - Bozen, School of Economics and Management)

  • Andrea Pinna

    () (Free University of Bolzano - Bozen, School of Economics and Management)

Abstract

This paper uses order-level data of all traders 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 dark pool 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.

Suggested Citation

  • Luisella Bosetti & Pietro Gottardo & Maurizio Murgia & Andrea Pinna, 2014. "The Impact of Large Orders in Electronic Markets," BEMPS - Bozen Economics & Management Paper Series BEMPS15, Faculty of Economics and Management at the Free University of Bozen.
  • Handle: RePEc:bzn:wpaper:bemps15
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Large Orders; Electronic exchange; Upstairs market; Block trading; Price Impact; Liquidity; Dark Pool;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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