The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects (Revised: 10-94)

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Abstract
This paper examines the effects of large (block) transactions on the prices of common stocks. We develop an explicit model of the mechanism by which block trades are accomplished. The model yields several empirical hypotheses that are tested with a unique new data set. The data set covers nearly 4,240 transactions in the period 1985-1990, primarily in less liquid stocks. The blocks can be identified as either seller-initiated or buyer-initiated, and are all arranged in the ‘upstairs’ off-exchange market by either exchange members or non-exchange members. This knowledge is critical since the direction of hypothesized price effects depend on who initiates the trade and where it is executed. We find price impacts are positively related to trade size, and that this relation is non-linear, as predicted by the model. Trades executed on the OTC market have significantly larger price impacts than the impacts for comparable trades on the NYSE or AMEX. Further, there are significant differences in the price response to buyer-initiated and seller-initiated block trades.

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