Price Impacts of Block Trading on the New York Stock Exchange

Daily institutional trades and stock price volatility in a retail investor dominated emerging market

“…Many studies suggest that institutional purchases are primarily driven by information, whereas institutional sales are driven more by liquidity needs and noninformational considerations (Scholes, 1972;Kraus and Stoll, 1972;Chan and Lakonishok, 1993). A number of recent papers further argue that sell decisions are, in general, not made optimally.…”

“…Kraus and Stoll (1972) suggest that the price effects of block trading can be ascribed to a change in the underlying value of a stock (the information effect) or to a temporary deviation in price (the distribution effect). They find that there is an information effect for block purchases, but not for block sells.…”

“…A number of previous studies find that the buy orders of informed investors convey more information than the sell orders, and that institutional buys and sells have asymmetric price impacts (Scholes, 1972;Kraus and Stoll, 1972). Although an institution's decision to buy a particular stock from a group of unlimited choices can convey favorable firm-specific information, its decision to sell a particular stock from the limited number in its portfolio does not necessarily convey negative information.…”

“…Coval and Stafford (2007) find that mutual funds that are experiencing significant outflows have no choice but to sell some of their holdings quickly to cover redemptions, and that this causes price pressure. Regulations and self-imposed constraints effectively prevent mutual funds from raising funds by short-selling other securities (Kraus and Stoll, 1972;Almazanm, Brown, Carlson, and Chapman, 2004), and thus they cannot help to ease the pressure of urgent liquidity-driven ''fire sales.'' Note that in China, short-selling is prohibited, and institutional (and individual) investors cannot raise funds by short-selling other securities.…”

A sample-path approach to optimal position liquidation

“…Naturally, the magnitude of market impact and, consequently, the loss due to adverse price movements, depend not only on the size of trades, but also on the time windows between the transactions. For a detailed discussion of the issues related to market impact, see, among others, Chan and Lakonishok (1995), Kein and Madhavan (1995), Kraus and Stoll (1972). Some of the latest developments on the optimal transaction implementation and optimal trading policies are reflected in papers by Bertsimas and Lo (1998), Bertsimas, Lo, and Hummel (1999), Rickard and Torre (1999), Almgren and Chriss (2000), and Almgren (2003).…”