Abstract
This paper investigates the existence of equilibria with information-based block trading in a multiperiod market when no investor is constrained to block trade. Attention is restricted to equilibria in which a strategic uninformed institution (i.e., one which is forced to rebalance its portfolio but is free to choose an optimal rebalancing strategy) is willing to trade a block rather than break up the block into a series of smaller trades. Examples of such equilibria are found and analyzed. A STRIKING FACT ABOUT the New York Stock Exchange is that roughly half of the volume is traded in blocks of over 10,000 shares.1 However, despite the obvious importance of block trading, the types of market microstructures which generate block trades are not well understood. This paper provides a theoretical rationale for block trades by modeling an equilibrium in which blocks are endogenously traded. In particular, we show that, even when a block can be broken up into a sequence of small trades, blocks may still be traded as part of both informed and uninformed investors' optimal trading strategies. The analysis is conducted in a simple market in which there are competitive dealers and specialists, a group of small noise traders, and a strategic institution which trades either to exploit private information or because it is constrained to rebalance its portfolio. The main results about block trading in this setting are as follows:
Published Version
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