Block Trades Research Articles

The price of the slow lane: Traffic congestion and stock block trading premium

AbstractUsing data on city‐level daily traffic congestion and stock block trading, we investigate the impact of trader cities' traffic congestion on the stock block trading price. We find that higher level of traffic congestion in the traders' cities is associated with lower stock block trading premium, particularly when the information asymmetry between the trading parties is high. We also find that the buyers have more bargaining power in determining the price premium of block trading. Moreover, we employ a multi‐pronged approach to address the identification issue and find confirming evidence for the causal link.

Ownership Structure, Incentives, and Asset Returns

We develop a dynamic equilibrium model to derive the endogenous relations among firms’ ownership structures, managerial incentives, and asset returns. Ownership concentration is positively related to managerial incentives (PPS) but is negatively related to its expected stock (dollar) return, and volatility. If initial block ownership is above (below) its steady-state level, block ownership and managerial PPS decrease (increase) over time to their steady-state levels, whereas the expected stock returns, return volatilities, and the price impacts of block trades increase (decrease). The convergence of these variables to their respective steady-state levels is faster for firms that are less productive, that are riskier, and whose earnings are more sensitive to managerial actions. The price impact of block trades is larger in firms that are more productive and smaller in firms whose earnings are more sensitive to managerial actions. Changes in the expected stock return over time are negatively affected by changes in block ownership but positively affected by changes in managerial incentives. Relative to owner-managed firms, more widely owned firms have lower expected stock returns and volatilities, faster dispersion of block ownership, and smaller but more variable price impacts of block trades. Compared with diffusely owned firms, firms with significant blockholdings have lower expected stock returns, higher return volatilities, and less powerful managerial incentives. This paper was accepted by Tomasz Piskorski, finance. Funding: H. W. (H.) Jung and Q. Zeng received an internal research grant (AUD 15,000) in 2015 from the Faculty of Business and Economics at the University of Melbourne. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2023.4696 .

What Drives Shareholders' Reaction To CEO Turnovers, Dividend Changes, and Block Trades? A Theoretical Background

Abstract This study presents a review of theoretical concepts described in the literature that explain how corporate events might be perceived by investors. The theoretical discussion in this paper is related to three corporate events: CEO turnovers, dividend payouts, and block trades. The objective of this analysis is to identify and systemise the theoretical background for the drivers of shareholders' responses to these three corporate decisions. In other words, I will provide answers to the following questions: why is the market reaction sometimes positive and other times negative, and why is it sometimes stronger and other times weaker? Based on the literature review, I will show that each of the analysed corporate events might be perceived by shareholders as either positive or negative signals concerning perspectives and future cash flows. Consequently, corporate events might drive share prices up or down. However, shareholder reaction to one type of the event, such as CEO turnovers, will not always be homogeneous – only positive or negative. The strength of this reaction may also vary. The main reasons for these variations are the effectiveness of corporate governance mechanisms, investors' perceptions of the event, the event's peculiarities, and the company's characteristics, as well as other relevant circumstances and factors.

Corporate Bond Trading: Finding the Customers’ Yachts

Corporate bond trading is evolving. Dealers, long central to bond trading, still play a critical role, but new technologies have created more competitive and transparent markets. There are fewer dealers now, and market concentration has increased, but execution costs are far lower than in the past, and bond market volume has soared. Small bond trades now execute at approximately the same transaction costs as large block trades. Yet, although corporate bond markets are better, they are not perfect. Match making as opposed to market making leaves the bond market susceptible to periodic illiquidity. Bond issues more subject to information leakage or those that are highly illiquid still trade almost entirely with dealers. There is still limited pretrade transparency, which hurts bond customers both large and small. Overall, however, bond markets are better.

Multi-party computation mechanism for anonymous equity block trading: A secure implementation of turquoise plato uncross.

Dark pools are financial trading venues where orders are entered and matched in secret so that no order information is leaked. By preventing information leakage, dark pools offer the opportunity for large volume block traders to avoid the costly effects of market impact. However, dark pool operators have been known to abuse their privileged access to order information. To address this issue, we introduce a provably secure multi-party computation mechanism that prevents an operator from accessing and misusing order information. Specifically, we implement a secure emulation of Turquoise Plato Uncross, Europe's largest dark pool trading mechanism, and demonstrate that it can handle real world trading throughput, with guaranteed information integrity.

Càdlàg semimartingale strategies for optimal trade execution in stochastic order book models

We analyse an optimal trade execution problem in a financial market with stochastic liquidity. To this end, we set up a limit order book model in continuous time. Both order book depth and resilience are allowed to evolve randomly in time. We allow trading in both directions and for càdlàg semimartingales as execution strategies. We derive a quadratic BSDE that under appropriate assumptions characterises minimal execution costs, and we identify conditions under which an optimal execution strategy exists. We also investigate qualitative aspects of optimal strategies such as e.g. appearance of strategies with infinite variation or existence of block trades, and we discuss connections with the discrete-time formulation of the problem. Our findings are illustrated in several examples.

Off‐market block trades: New evidence on transparency and information efficiency

AbstractThis paper examines the price impact of off‐market block trades in futures markets. Consistent with previous literature based on stock markets, a statistically significant price reaction is documented around the time that the trades are executed. This paper extends previous work by documenting a further statistically significant price reaction at the time that block trades are later reported. Contrary to previous research, these findings imply that delaying the reporting of off‐market trades has an impact on markets by delaying the speed of adjustment to the information conveyed by block trades and therefore market price efficiency.

Private benefits from control block trades in the Spanish stock exchange

A control block trade can be explained by the expectation of financial gains, shared by all shareholders, or by the expectation of private benefits, exclusive to the buyer and possibly at the expense of other shareholders’ rents. The market for corporate control contributes to social welfare when it improves the efficiency of the allocation of resources. When the objective of a block transaction is private benefits, social welfare may be negatively impacted as minority shareholders could withdraw from the market. Therefore the estimation of private benefits would allow the efficiency of the market for corporate control to be assessed. Specifically, the aim of this paper is to calculate private benefits in the Spanish market for partial control. Using a sample of partial control transactions over the period 1990–2016, we find that the median of private benefits is negative, therefore it appears that there is no inefficient use of resources in the Spanish partial control market as a whole, however private costs are detected. The variability of private benefits is explained in a significant way by variables related to the control structure of the target firm, such as the controlling position of the buyer after the transaction, the contestability of control and the cross-shareholdings between the buyer and large shareholders. Performance and the size of the firm are significant as well.

Adverse Selection and Liquidity: From Theory to Practice

This paper shows how to map predictions of theoretical models of market microstructure into operational empirical measures of liquidity. A meta-model implies an empirical measure of liquidity, denoted L, which describes various characteristics of trading and funding liquidity such as trading costs, bet sizes, haircuts, and capital requirements. When mapped into existing models of adverse selection, the meta-model also describes precisely how adverse selection shows up in pricing accuracy and resiliency. The meta-model is consistent with models of both block trading and flow trading. It highlights a deep connection between time and adverse selection.

The Power of Choice: Discrete Duration in Delayed Trade Publication

This paper explores the benefits post-trade transparency delays provide block trade facilitators who are afforded discretion in the timing of publishing the size and price of their trades on the London Stock Exchange. Operationalized under the auspices of MIFID II, we model the delay using Cox's proportional hazard framework and show dealers elect a particular post-trade transparency delay that assists in inventory management and market-making/facilitation profits. More generally for the market, we show publication creates volatility impacts, albeit less that of execution. We find the longer the delay, the lower the price volatility impact of publication.

Block Trading Based Volatility Forecasting: An Application of VACD-FIGARCH Model

The purpose of this study is to construct the ACD model for the block trading volume duration. The ACD model based on the block trading volume duration is referred to as Volume ACD (VACD) in this study. By integrating with GARCH-type models, the VACD based GARCH type models, which include VACD-GARCH, VACD-IGARCH and VACD-FIGARCH models, are set up. This study selects Chunghwa Telecom (CHT) Inc., offering the America Depository Receipt (ADR) in NYSE, to investigate the block trading volume duration in Taiwanese equity market. The empirical results indicate that the long memory in volume duration series increases dependence at level of volatility clustering by VACD (2,1)-FIGARCH (3,d,1) model. Moreover, the VACD (2,1)-IGARCH (1,1) exhibits relatively better performance of prediction on capturing block trading volume duration. This volatility model is more appropriate in this study to portray the change of the CHT Inc. prices and provides more information about the volatility process for investment strategy, which can be a reference indicator of financial asset pricing, hedging strategy and risk management.

The impact of block trades on stock price synchronicity: Evidence from China

We examine the impact of block trades on stock price synchronicity using a unique dataset in China for the period of 2008–2014. We find that block trades are negatively associated with synchronicity. Further analysis indicates that the negative impact of block trades is more pronounced in firms with weaker information environments. An increase in the information content of block trades leads to a significant decrease in synchronicity. We also find that premium block trades contribute significantly more to the reduction in synchronicity than discount block trades. Together, the evidence suggests that block trading activities in China’s stock market help disseminate firm-specific information into stock prices.

The price effect of block trades: evidence from the Tunisian Stock Exchange

This paper analyses the impact of block trades (upstairs market) on the Tunisian Stock Exchange from January 2, 2008 to December 31, 2017. We find that the buyer-initiated trades in upstairs market have a positive temporary impact on the main market which confirms the liquidity hypotheses. The Tunisian market is found to react positively after the block initiated by a seller, which is not unexpected. This reaction can be explained by the visibility hypothesis initially developed by Miller (1977) who argues that a volume shock increases the probability that an investor is interested in buying this stock especially when short selling is limited or prohibited. We also think that some Tunisian investors (individual small shareholders) react regardless of the direction of the block transaction, showing a naive behaviour. Our results reject the information hypothesis suggesting that the upstairs brokers have the informational advantage about unexpressed demand and thus the market can absorb large block trades (Grossman, 1992). Then, we highlight the information leakage dealing with block trades according to the position of block brokers (application negotiation or construction pools of counterparts).

The price effect of block trades: evidence from the Tunisian Stock Exchange

This paper analyses the impact of block trades (upstairs market) on the Tunisian Stock Exchange from January 2, 2008 to December 31, 2017. We find that the buyer-initiated trades in upstairs market have a positive temporary impact on the main market which confirms the liquidity hypotheses. The Tunisian market is found to react positively after the block initiated by a seller, which is not unexpected. This reaction can be explained by the visibility hypothesis initially developed by Miller (1977) who argues that a volume shock increases the probability that an investor is interested in buying this stock especially when short selling is limited or prohibited. We also think that some Tunisian investors (individual small shareholders) react regardless of the direction of the block transaction, showing a naive behaviour. Our results reject the information hypothesis suggesting that the upstairs brokers have the informational advantage about unexpressed demand and thus the market can absorb large block trades (Grossman, 1992). Then, we highlight the information leakage dealing with block trades according to the position of block brokers (application negotiation or construction pools of counterparts).

Off-Market Block Trades: New Evidence on Transparency and Information Efficiency

This paper examines the price impact of off-market block trades in futures markets. Consistent with previous literature based on stock markets [Gemmill, 1996, Journal of Finance], a statistically significant price reaction is documented around the time that the trades are executed. This paper extends previous work by documenting a further statistically significant price reaction at the time that block trades are later reported. Contrary to previous research, these findings imply that delaying the reporting of off-market trades has an impact on markets by delaying the speed of adjustment to the information conveyed by block trades and therefore market price efficiency.

Pure Altruistic Gift and the Ethics of Transplant Medicine

The article argues that altruistic giving based on anonymity, which is expected to promote social solidarity and block trade in human body parts, is conceptually defective and practically unproductive. It needs to be replaced by a more adequate notion which responds to the human practices of giving and receiving. The argument starts with identification of the main characteristics of the anonymous altruistic donation: social separation of the organ donor (or donor family) from the recipient, their mutual replaceability, non-obligatoriness of donation, and non-obligatoriness of reciprocation on the recipient’s part. Since these characteristics are also central to typical market relations, anonymous altruistic donation not only cannot promote solidarity but may encourage proposals for (regulated) markets of transplantable organs. Thus, transplant ethics needs to be reframed. It needs to be rooted in, rather than promote, the practices of giving and receiving known to human societies. As the basis for such reframing, the idea of sharing in another’s misfortune is proposed. It relies on the human practices of giving and receiving and, with appropriate regulatory safeguards, can provide a better conceptual basis for blocking commercial exchanges of human body parts.

Effect of pre-disclosure information leakage by block traders

PurposeThis paper aims to investigate pre-disclosure information leakage by block traders and market reactions to disclosures of off-hours block trading compared to off-market trading.Design/methodology/approachStock responses were analyzed based on timely disclosures regarding Korean firms’ decisions to dispose of their own shares to improve their financial structures.FindingsThe results showed that pre-disclosure abnormal returns were generated in off-hours block trading. In contrast, on disclosure days, the returns for off-hours block trading were significantly lower than those for off-market trading. It was consistent with prior studies, indicating that block traders were related to information leakage and caused moral hazard problems.Originality/valueThe comparison between off-hours block trading and off-market trading provides important insights regarding block traders’ behavior. This study’s findings on the leakage of information from block traders indicate the need for firms to exercise caution when using block traders.

Shorting in Broad Daylight: Short Sales and Venue Choice

Using a novel database on venue short sales and market design characteristics, we ask: Where do short sellers exploit their information advantage? Consistent with the prediction of Zhu (2014), we find that exchange short sales comprise a larger proportion of trading and are more informative about future prices than dark-pool short sales, particularly when there is greater competition among short sellers to trade and in the presence of short-lived information. When examining market design characteristics, we find that dark pools offering volume-weighted average price crossing attract more short sales, whereas those offering block trading attract fewer short sales.

Transfers of corporate control in firms with noncontrolling blockholders

AbstractI model the choice between a negotiated block trade and a public tender offer as means of acquiring control in a firm with a large minority blockholder. Potential acquirers differ in their (privately known) value‐creation ability. In equilibrium, block trades are made by lower ability acquirers compared to tender offers. The equal opportunity rule (EOR) and the “freezeout” rule are complements in promoting efficiency of control transfers. Stronger investor protection may hamper value‐increasing takeovers when the EOR is present. The model also delivers predictions about announcement returns and the incidence of block trades and tender offers under different legal regimes.

Taxation of Wealthy Individuals, Inequality Governance and Corporate Social Responsibility

This paper provides new evidence on reducing income (or wealth) disparity. Accurate inequality measures are important to policymakers with a concern for inequality governance and the calibration of tax policy. Our empirical findings show that block trading of securities has no significant impact on volume or amount before and after the 2015 abolition of capital gains taxation in Taiwan. Crucially, the results ultimately demonstrate complete capital gains tax redistribution failure, due to capital flight into overseas investments. Thus, tax policy cannot be the only channel to reduce these inequalities. At the national level, policymakers could build on the conclusions drawn in this paper by developing corporate social responsibility (CSR) strategies and adjusting the tax systems for wealthy people so as to achieve policy goals. Our study aims to provide the first quantitative empirical evidence recognizing significant factors among the CSR strategies pursued to strengthen the rules of inequality governance. More precisely, we have also applied both fully modified and dynamic ordinary least squares cointegration tests, as well as conical cointegration regression, to check the robustness of our estimation results.