orders, and the only way in which this imbalance canbe
resolvediswithapricechange.Thispricechangethatarises
fromlackofliquiditywillgenerallybetemporaryandwillbe
reversed as liquidity returns to the market.
Thesecondreason fortheprice impactisinformational. A
largetradeattractstheattentionofotherinvestorsinthatasset
marketbecauseitmightbemotivatedbynewinformationthat
thetraderpossesses.Notwithstandingclaimstothecontrary,
investorsusuallyassume,withgoodreason,thataninvestor
buyingalargeblockisbuyinginadvanceofgoodnewsand
thataninvestorsellingalargeblockhascomeintopossession
ofsomenegativenewsaboutthecompany.Thispriceeffect
willgenerallynotbetemporary,especiallywhenwelookata
large numberof stockswhere such large tradesare made.
Althoughinvestorsarelikelytobewrongafairproportionof
the time on theinformational valueof large block trades,
thereis reasonto believethattheywillbe rightalmost as
often.
How Large Is the Price Impact?
There is conflicting evidence on how much impact large
tradeshaveonstockprices.Ontheonehand,studiesofblock
tradesontheexchangefloorseemtosuggestthatmarketsare
liquid and thattheprice impactof tradingis small and is
reversed quickly. (These studies, however, have generally
looked at heavily traded stocks at the New York Stock
Exchange.)Ontheotherhand,thereareotherswhoarguethat
thepriceimpactislikely tobelarge,especiallyforsmaller
and less liquid stocks.