The Packaging of Small Trades: Evidence of Price Impact Costs on Block Trading from the Singapore Exchange

43 Pages Posted: 27 Aug 2011

See all articles by Murphy Lee

Murphy Lee

University of Technology Sydney (UTS)

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Date Written: August 25, 2011

Abstract

The majority of block trading literature uses individual trades to calculate price impact costs. However, block traders are known to break up their large trades into smaller orders in order to reduce trading costs and hide private information. This paper uses proprietary data from the Singapore Exchange to re-examine price impact costs on block trading through implementing a more accurate re-packaging process. This paper finds that liquidity effects and information effects are significantly under-estimated and over-stated respectively when calculations are made in individual trades. Consistent with prior findings, the largest buy and sell packages face the highest liquidity premiums and have information content. In contrast, a price reversal is found after execution of a buy or sell package. New empirical evidence shows that institutional packages of all trade sizes and the largest retail packages have information content. Further evidence shows that a higher premium must be put up to attract retail investors to trade and the inability of retail investors to distinguished between informed and uninformed trade packages. Lastly, this paper finds that breaking up a large trade into smaller trades does not reduce price impact cost. In general, this paper highlights the importance of the re-packaging process when studying block trades and provides new empirical evidence surrounding price impact costs for both institutional and retail trade packages in the equities market.

Keywords: Block Trades, Microstructure, Price Impact Costs

JEL Classification: G10, G14

Suggested Citation

Lee, Murphy and Walter, Terry Stirling, The Packaging of Small Trades: Evidence of Price Impact Costs on Block Trading from the Singapore Exchange (August 25, 2011). Available at SSRN: https://ssrn.com/abstract=1917117 or http://dx.doi.org/10.2139/ssrn.1917117

Murphy Lee (Contact Author)

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
175
Abstract Views
1,222
Rank
308,114
PlumX Metrics