Price Impact of Block Trades and Price Behavior surrounding the Bombay stock exchange

Security Exchange Board of India, ( SEBI ) , the regulative authorization for capital market operations in India has classified big trade sizes into two classs – block trade and bulk trade.

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Block trades are defined as a individual trade with a minimal measure of 500,000 portions or of a value of 50 Millions executed through a individual dealing on block trade window. The block trade window operates for merely the first 35 proceedingss of a trading twenty-four hours and the monetary value of trade is capable to an top and downside cap of A± 1 % of the governing market price/previous twenty-four hours shutting monetary value. In a block trade, investors are non given a prospectus: the portions are marketed to institu tional investors through telephone calls. SEBI has besides made it compulsory for the stock agents to unwrap on a day-to-day footing the block trades made through Data Upload Software ( DUS ) .

A block trade can be structured in a figure of ways:

aˆ? Bought trade. In a bought trade, the investing bank moving as director of the block trade buys the portions from the marketer befor vitamin E it starts its selling attempts. The director will by and large resell the portions every bit shortly as possible after they are acquired from the marketer. To the extent that it is able to resell the portions at a higher monetary value, the director will maintain the difference.

aˆ? Non-risk trade. This is frequently known as an accelerated equity offering ( AEO ) . Here, the

director will construct a book of demand for the marketer before holding on a monetary value ( based on that demand ) . Frequently, the director will have a committee from the marketer. Sometimes the director will gain an agreed spread.

aˆ? Back-stopped trade. This falls someplace between a bought trade and an AEO. In a back-

stopped trade, the director does non take the portions onto its ain books before selling

( as with a bought trade ) , but it do es vouch the merchandising stockholder a minimal monetary value.

Bulk tr fruit drinks refer to state of affairss where the entire measure traded in a twenty-four hours ( in normal trade window ) by a peculiar client is greater than 0.5 % of figure of equity portions of company listed on the exchange. Bulk trades happen all through the trading twenty-four hours. Bulk trades carried out for the twenty-four hours should be revealed by a agent on the same twenty-four hours to the stock exchange utilizing the DUS.

Trading Mec hanism for Bloc k Trades

Like other markets, there are two economically dis tinct trading mechanisms for large-block minutess in India.

1 ) First, some big pre-negotiated trades ( or in instances where agents facilitate the trade by

turn uping counter-parties to the trade ) are transacted in a separate aˆz block trade window ‘

( like upstairs market in NYS E ) , which opens for merely 35 proceedingss at the market gap.

2 ) Second, a big measure order can be sent straight to the normal trade window through bound or market orders ( like downstairs market in NYS E ) , which constitutes the uninterrupted intraday markets and batch shutting period. The focal point is merely on the big size trades executed in the normal trade window.

There are assorted grounds for excepting the trades executed through the block trade window.

1 ) First, these are pre-negotiated trades and the aim of the trades may be different from the information-motivated trades, like revenue enhancement benefits, household agreements, within group transportations, etc. In India, the benefits of a decreased revenue enhancement rate in capital additions is available merely for sha RESs transacted through a recognized stock exchange and hence parties execute such big pre- negotiated trades through the stock exchange.

2 ) Second, it is hard to find the nature ( buy/sale ) of the block orders since there

are two parties taking opposite base in the upstairs dealing, ensuing in coincident purchase and sale of stocks. Inaccessibility of exact clip casts for these trades makes the comparing with most recent market monetary values impossible.

3 ) Last, the monetary value of block dealing in upstairs market is capable to floor and cap monetary value of

A± 1 % of the governing market price/ old twenty-four hours shutting monetary value, restricting the benefits of private information.

Although big orders through the normal trade window are capable to front-running by the agents and come with a hazard that the purchaser may non acquire the full command measure, but still some investors may prefer to merchandise big measure in the normal market, instead than the block trade window in order to maintain their individuality secret.

This behaviour may besides be because trading at the normal window is free from the pricing ( A± 1 % )

and timing ( first 35 proceedingss of trading ) limitation that is applicable to the block trade window.

Guidelines for Execution of Bulk and Block De ALSs on the Stock Exc hang Es

In India, coverage of majority and block trades became compulsory since 14th January, 2004 and 2nd

September, 2005 severally.

1 ) SEBI had issued a round ( mention no. SEBI/MRD/S E/C ir-7/2004 ) on January 14,

2004 on revelations of inside informations of “ bulk “ trades with a position to leave greater transparence to the market on such minutess executed on the stock exchanges. In footings of paragraph 1.1 of that handbill, a “ majority ” trade constituted of “ all minutess in a scrip ( on an exchange ) where entire measure of portions bought/sold is more than 0.5 % of the figure of equity portions of the company listed on the exchange ” . Thus the quantitative bound of 0.5 % could be reached through one or more minutess executed during the twenty-four hours in the normal market section.

2 ) There is nevertheless a felt demand of the market to put to death big trades through a individual dealing easy without seting either the purchaser or the marketer in a disadvantageous place. In order to ease executing of such big trades, the stock exchanges a rhenium being permitted to supply a separate trading window.

3 ) A “ block ” trade will be capable to the undermentioned conditions:

O The said trading window may be kept unfastened for a limited period of 35 proceedingss from the beginning of trading hours i.e. the trading window shall stay unfastened from 8.55 am to

09.30 am.

O The orders may be placed in this window at a monetary value non transcending +1 % from the governing market price/previous twenty-four hours shutting monetary value, as applicable.

O An order may be placed for a minimal measure of 500,000 portions or mini silent value of

Rs.5 crore.

O Every trade executed in this window must ensue in bringing and shall non be squared off or reversed.

O The stock exchanges shall circulate the information on block trades such as the name of the scrip, name of the client, measure of portions bought/sold, traded monetary value, etc to the general populace on the same twenty-four hours, after the market hours. Disclosure is to be made within one hr from the stopping point of the trading hours ( i.e. 5.00 autopsy ) .

O There is no alteration in respect to the revelation of trade inside informations of “ bulk trades ” as specified

in the earlier S EBI round mention no. SEBI/MRD/SE/C ir -7/2004 dated January 14,

2004, and such revelations shall be continued to be made by the stock exchanges to the general populace on the same twenty-four hours after the market hours.

O The stock exchanges shall guarantee that all appropriate trading and colony patterns every bit good as surveillance and hazard containment steps, etc. , as soon applicable to the normal trading section are made applicable and implemented in regard of the proposed particular window besides.

4 ) The stock exchanges are advised to:

O Make necessary amendments to the relevant bye- Torahs, regulations and ordinances for the execution of the above determination instantly.

O Bring the commissariats of this handbill to the notice of the member brokers/clearing members of the Exchange and besides to circulate the same on the web site.

O Communicate to SEBI, the position of the execution of the commissariats of this handbill in the Monthly Development Report for the month of September 2005.

Price Effectss of Block Trade

The lasting monetary value consequence is explained b y permutation consequence ( Scholes,1972 ) and information consequence ( Chan & A ; Lakonishok, 1993 ) . Due to miss of close replacements, an extra demand ( supply ) of a security leads to extra demand ( supply ) curve that is non absolutely elastic and therefore leads to a new equilibrium monetary value. Information consequence attributes the lasting monetary value effects to the release of new information, which the informed bargainer efforts to hard currency in before it becomes public. Arrival of block trades in the market signals the presence of private information and causes the investors or bargainers to revise their monetary value outlooks depending on the nature of block trades.

The impermanent monetary value consequence is explained by liquidness costs and monetary value force per unit area theories. Liquidity cost theories argue that a impermanent monetary value impact around a block trade reflects compensation for the liquidness pro vided by the counterparties, described as marketer of liquidness ( Holthausen, Leftwich & A ; Marie goeppert mayers, 1987 ) . Price force per unit area hypothesis suggests that the purchase ( sale ) of a big block is associated with a short -run addition in demand ( supply ) for the security ensuing in premium ( price reduction ) ( S hleifer, 1986 ) . It is through empirical observation observed that lasting impact is higher for block purchases than in instance of block gross revenues. F urther, surveies have found that the magnitude of the lasting monetary value impact of block purchases is greater than the monetary value impact of block gross revenues ( Gemmill, 1996 ; Aitken & A ; Frino, 1996 ; Keim & A ; Madhavan, 1995, 1996 and 1997 ) .

Hence, the lasting constituent is the sum by which bargainers revise their estimations of the

value based on the trade, and the impermanent constituent reflects the transitory price reduction needed to suit the block.

Price consequence of block minutess has been estimated utilizing three steps ( Madhavan, 2000 ) .

1 ) The entire monetary value consequence is normally defined as the difference between the equilibrium monetary value before the block trade and the block trade monetary value. It is calculated from unfastened to the block trade monetary value.

2 ) The impermanent consequence is defined as the difference between block trade monetary value and

equilibrium monetary value station the block trade.

3 ) The difference between the entire monetary value impact and the impermanent monetary value impact ( i.e. difference between equilibrium monetary value before block trade and equilibrium monetary value after block trade ) is called lasting monetary value consequence.

Figure 1: Sum, Temporary and Permanent Effect of Block Trade


Several surveies have looked at the impact of block trades on stock monetary values. A figure

of these surveies, including Holthausen, Leftwich and Mayers ( 1987, 1990 ) , Choe, cInish

and Wood ( 1992 ) and Chan and Lakonishok ( 1993 ) in the USA, and Aitken and Frino ( 1996 ) in Australia, have found that an unusual phenomenon is associated with these block trades. Although both block purchases and gross revenues are associated with positive and negative lasting monetary value effects severally, the returns calculated from the block trade to some post-block period indicate positive returns for both purchases and gross revenues.

In the twelvemonth 1996 Gemmill ( 1996 ) established that an dissymmetry exists in the monetary value behaviour environing purchaser – and seller-initia ted trades on the LSE. However, the prejudices introduced through the being of the command -ask spread were ignored in his survey. Later in the Year 2006 Mr. Andros Gregoriou in his survey The dissymmetry of the monetary value impact of block trades and the bid-ask spread Evidence from the London Stock Exchange accounted for the prejudices in the bid-ask spread utilizing a sample of 1.6 million block purchases and 1.2 million block gross revenues in the LSE over the clip period 1998 -2005.

In 2006 a survey titled “ An event clip survey of the monetary value reaction to barricade trades on The Australian stock exchange ” By Alex Frino, Elvis Jarnecic & A ; Andrew Lepone analyzes block trades on the Australian Stock Exchange utilizing an event survey attack. A major determination in this survey is an immediate reversal for the trade subsequent to the block dealing, for both block purchases and block gross revenues.

In April 2010 a recent survey by Mr. Sobhesh Kumar Agarwalla & A ; Ajay Pandey Price Impact of Block Trades and Price Behavior Surrounding Block Trades in Indian Capital Market analyzed the lasting ( information consequence ) and impermanent ( liquidity consequence ) impact of block trades transacted in the National Stock Exchange of India. They c oncluded that the lasting monetary value impact is more for block purchases than for block gross revenues bespeaking that block purchases are more enlightening than block gross revenues, which may be motivated by liquidness demand. Unlike in other markets, we observe that the temporar y impact is greater than the lasting impact in instance of block purchase.

We in our paper chiefly concentrates to analyze whether the impact of block trades on the monetary value of the stocks is important or non utilizing a different statistical tool known as mated T-Test.


Sudha Murthy ‘s Bloc K Deal:

Sudha Murthy, one of the three Trustees ‘ of Infosys Foundation sold her 2 million portions in Infosys on November5th, 2009. Sudha Murthy sold her portions at Rs. 2151.80 on the BSE. She transacted at 3.2 % price reduction to the twenty-four hours ‘s shutting monetary value. The Infosys stock responded to the trade. The portions fell 0.74 % on the twenty-four hours of the trade struck. On that twenty-four hours, even stock market was in the Red province at the clip of shutting monetary value. The trade did non i mpact much on the Infosys stock because one of the boosters of Infosys S.Gopala Krishnan bought around

400000 portions in a separate dealing worth of Rs.86.6 crore. The market behaved

indifferently in this instance when Sudha Murthy unlocked her value to raise the money to foster the start-ups. She raised about 173.4 crore for a venture capital house.

Relianc vitamin E Block trade:

Reliance industries Ltd. raised $ 763 million through a block sale of 33 million portions on January 11th 2010. The trade was a bought trade, UBS ( an investing banker ) acted as an intermediary to strike the trade. After the block trade is done, the stock of Reliance declined

4.8 % . Here in this instance the market responded negatively to the block trade.

From the above two historical analysis, it ca n be said that Block trades impact on the stocks of the companies, even though it is really blue in the instance of Infosys.

DATA Collection:

The information has been collected from BSE india.The informations set includes all the block trades happened during the pe riod of Jan 2008 to June 2010. For the intent of the analysis we have collected the information of the books incorporating unfastened, close, and the clients inside informations that either sold or bought the securities.

A sample information has been shown in the below tabular array:




Code Company Client Name


Type * Quantity


Price Open Clo Se

15/01/10 532764 Geecee Vent ARONI COMMERCIALS LIMITED B 921700 96 96.4 96.9


25/01/10 531863

HOL D GOPALA PILLAI VIJAY KUMAR B 2170000 61.75 63 68.1

28/01/10 500139 Fedders Lloyd LLOYD SALES PRIVATE L IMITED B 665087 81.1 79.9 78.8

03/02/10 532631 Fame India INOX L EISURE L IMITED B 15057751 44 44.4 46.1

05/02/10 532631 Fame India INOX L EISURE L IMITED B 1126545 50.75 47.9 50.8

15/02/10 523207 Ca mlin ANAGHA INVESTMENT PVT LTD. B 6000000 23 23.9 25.4


15/02/10 530117 HK Finechem

PARIKH B 548692 25.1 25 26.5

16/02/10 500117 DCW CRESTA FUND L IMITED B 2550000 20.6 20.55 21.2

16/02/10 533008 OCL Iron



LIMITED B 48928854 21 22 23.1

17/02/10 533096

POWER ALBULA INVESTMENT FUND L TD B 4307082 108.25 108.55 108.25

17/02/10 504000 Elpro Intl CRESTA FUND L IMITED B 410000 552.25 570 600.9


18/02/10 531863

HOL D SALYA PRIVATE LTD. B 10016550 61.5 58 60.2


22/02/10 531681 Amradeep Inds

LTD B 2702750 16.6 16.45 15.65

Exhibit-1 Shows the complete set of informations which we have considered for the intent of analysis.


To happen out the impact of block trades on Indian stock markets, ab initio we have to see whether the difference in monetary values before and after the trade are significantly different or non.

This can be found by carry oning a mated T -Test on the sample of Data collected. Sample size: A random sample of 100 Block trades

Trial: Paired T-Test

Software bundle: SPSS 13

Sampling Technique: Simple Random sampling

Hypothesis Formation:

H0: There is No Significant Impact of Block trade on the portion monetary value

Hour angle: There is Significant Impact of Block trade on the portion monetary value


A random sample of 100 block trades has been selected and the monetary values of the books before and after the trade are taken and by utilizing SPSS a mated T-test has been conducted. The end product of the Test is as follows.

1 ) Descriptive statistics.

Paired Samples Statisticss






Pair1 Open










This tabular array gives the descriptive statistics of the unfastened & A ; shuting monetary values of books on the twenty-four hours when block trade had taken topographic point. In this instance, N represents the figure of books considered for the analysis.i.e, sample size is 100.and the Mean monetary values of the books before and after the trade are 768.709 & A ; 772.616 severally, with a standard divergence of 751.0097 & A ; 753.58455 severally. The last column gives the standard mistake of the mean for each of the two V ariables.




Pair1 Open & A ; Close





ntial Stat

4 ) Infe

2 ) Co-RelationStatistics:


Thisagainshowsthatthereare100pairsofobservations ( N ) .Thecorrelation betweenthetwo variablesisgiven in thethird column. In thisexampler=1.Thelastcolumngivethepvaluefor thecorrelation coefficient.Asalways, ifthepvalueislessthan orequaltothealphalevel, so you can rejectthenullhypothesisthatthepopulation correlativity coefficient ( I? ) isequalto0.In thiscase, P =.000, sowerejectthenullhypothesis.Thatis, wecanconcludethatthepopulation correlativity ( I? ) isdifferentfrom0.

3 ) InferentialStatistics:






Sig. ( 2-tailed )

e Mean I




95 % ConfidenceIntervaloftheDifference



Pair1 Open- Close









Thecolumnlabeled ” Mean ” isthedifferenceofthetwomeans ( 772.616-768.709=-3.9072 ) Thenextcolumnisthestandarddeviation ofthedifferencebetween thetwovariables ( 18.45in thisexample. )

Thecolumnlabeled ” T ” givestheobservedorcalculatedtvalue.In thisexample, thetvalueis-

2.117 ( wecan ignorethesign. ) Thecolumnlabeled ” df ” givesthedegreesoffreedomassociated

withthettest.Inthisexample, thereare99degreesoffreedom.Thecolumnlabeled ” Sig. ( 2- tailed ) ” givesthetwo-tailedpvalueassociatedwiththetest.Inthiscase, thepvalueis.037.If thishad been aone-tailed trial, wewouldneed tolookup thecriticalvalueoftin atable.

Weconsidered significancelevelfortesting hypothesisasI±= 5 % .

AsperthestatisticsIfpa‰¤I± , thenwewillrejectH0 & A ; AcceptsAlternatehypothesis.Fromour TestwegotP=0.037whichisLessthanI±=5 % .AndhenceweRejecttheNullHypothesisand cansafely concludethatthereisSignificantImpactofBlockdealontheshareprice.

So, from our survey we have statistically proved that there is an Impact of Block Deals on Indian Stock markets, but it ‘s besides really of import to happen out what sort of Impact this Block Deals have on The Indian Stock Markets.

This sole survey has been conducted by Dr. Sobhesh Kumar Agarwalla & A ; Ajay Pandey in Their Research Paper “ Price Impact of Block Trades and Price Behavior Surrounding Block Trades in Indian Capital Market ”

AS per this survey Block ( big sized ) trades are normally associated with presence of private information and are associated with monetary value motions ensuing from stock list costs and asymmetric information. Arrival of block trades in the market signals the pr esence of private information and this causes the investors to revise their monetary value outlooks depending on the nature of block trades.

It has been through empirical observation observed that information about block trades has assorted signaling consequence in footings of permanent and impermanent monetary value impact. Still the information on block trades is used extensively by professional bargainers to take informed investing determinations. While analysing the monetary value consequence of block trades, past surveies have non differentiated between yearss with a individual block trade and yearss with multiple Numberss of block trades. Arrival of multiple block trades in a trading twenty-four hours is more likely to increase the assurance on the information reaching, and hence one would anticipate that the lasting monetary value impact would be higher on those yearss, which have multiple block trades than during yearss with merely one block trade.


The lasting monetary value impact ( information consequence ) is more for block purchases than for block gross revenues in the Indian market, connoting that block pur pursuits are more enlightening than block gross revenues, which may be motivated by liquidness demand. Unlike the findings from other markets, we observe that the impermanent monetary value impact is greater than the lasting impact in instance of block purchases. This may be because of the higher impact costs or more of noise trading in the market

Market does admit the comparative information content in different types of block trades and reacts consequently. This is an of import penetration particularly in instance of an order goaded market like India. In the instance of a quote driven market, the specializer or the trader takes the opposite place for a trade and can detect block trades. Arrival of multiple block trades increases market assurance sing the information, and the lasting monetary value impact is found to be higher for yearss with multiple trades than yearss with individual trades


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