PRICE IMPLICATIONS OF BLOCK

The purpose of this research was to investigate the impact of block transactions onsecurity prices and on the price discovery process arising from such trades, withemphasis on actively traded JSE-listed securities. The focus was on the stock market’sreaction immediately before and after the block trade. First, the researcher investigatedwhether, on average, block trades leads to excess returns and, secondly, whether theresulting price impact is permanent or temporary.The research differentiated between buyer- and seller-initiated block trades andanalysed these trades separately. The findings indicate that there are asymmetriesbetween the two types of trades, specifically with respect to the frequency of occurrenceand the pricing, with seller-initiated trades being more prominent in all aspects. Theprevailing market conditions seem to account for the price asymmetry between sellerandbuyer-initiated trades while the market trading structure explains the total priceimpact.Using well established statistical techniques, the key findings reveal that while blocktrades have an impact on the prices of the underlying securities, the total impact ispredominately temporary as share prices revert back within one to three trades,irrespective of the type of trade. Contrary to expectations, the block size does not havean impact on the total price or on the speed of price re-adjustment. Further, if the markethas information about a pending block trade, there is insufficient evidence that theyreact to such information prior to the execution of the block trade.The research concludes that block trades do not lead to an adverse effect on securityprices of actively traded shares. This will be of interest to firms whose shares are proneto being traded in blocks, equity traders, policy makers and regulators.