Abstract
In this paper we analyse the effects of large block trades on market prices of Italian shares. Block trades on the Italian Stock Market are negotiated off-exchange with no interaction rules and a 60-minute disclosure time. Our sample embraces a period where listed stocks migrated gradually from the floor-based daily call auction to the electronic continuous trading system. In the meanwhile off-exchange block trades gradually declined, and they remained a viable trading option mainly for mid and small-cap stocks. We find that both seller and buyer-initiated blocks experience significant temporary and permanent price impacts. Price effects are also economically relevant. When trading in the central market is conducted in the open-outcry daily call auction, price impacts are consistently higher. We then analyse whether price effects are related to trade size as predicted by some theoretical model. Our findings show that temporary effects are an increasing function of any measure of block size, while permanent effects are not. We interpret our results as consistent with an upstairs market mostly used by traders who can credibly signal that they are uninformed [e.g., Seppi (1990)], and the implicit trading costs we uncover is further evidence of the importance of noninformational liquidity events that may affect significantly and permanently firms’ market valuation.