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The Impact of Large Orders in Electronic Markets

  • 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)

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.

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File URL: http://pro1.unibz.it/projects/economics/repec/bemps15.pdf
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Paper provided by School of Economics and Management at the Free University of Bozen in its series BEMPS - Bozen Economics & Management Paper Series with number BEMPS15.

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Length: 42 pages
Date of creation: Jun 2014
Date of revision:
Handle: RePEc:bzn:wpaper:bemps15
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  1. Ian Domowitz, 2002. "Liquidity, Transaction Costs, and Reintermediation in Electronic Markets," Journal of Financial Services Research, Springer, vol. 22(1), pages 141-157, August.
  2. Degryse, H.A. & de Jong, F.C.J.M. & van Ravenswaaij, M. & Wuyts, G., 2002. "Aggressive Orders and the Resiliency of a Limit Order Market," Discussion Paper 2002-80, Tilburg University, Center for Economic Research.
  3. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
  4. Seppi, Duane J, 1990. " Equilibrium Block Trading and Asymmetric Information," Journal of Finance, American Finance Association, vol. 45(1), pages 73-94, March.
  5. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
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  10. Madhavan, Ananth & Cheng, Minder, 1997. "In Search of Liquidity: Block Trades in the Upstairs and Downstairs Markets," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 175-203.
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  15. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  16. Andros Gregoriou, 2008. "The asymmetry of the price impact of block trades and the bid-ask spread: Evidence from the London Stock Exchange," Journal of Economic Studies, Emerald Group Publishing, vol. 35(2), pages 191-199, May.
  17. Chiraphol N. Chiyachantana & Pankaj K. Jain & Christine Jiang & Robert A. Wood, 2004. "International Evidence on Institutional Trading Behavior and Price Impact," Journal of Finance, American Finance Association, vol. 59(2), pages 869-898, 04.
  18. Kraus, Alan & Stoll, Hans R, 1972. "Price Impacts of Block Trading on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 27(3), pages 569-88, June.
  19. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
  20. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, vol. 50(4), pages 1147-74, September.
  21. G. Geoffrey Booth & Ji-Chai Lin & Teppo Martikainen & Yiuman Tse, 2002. "Trading and Pricing in Upstairs and Downstairs Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1111-1135.
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