Application Number : MS16SRP0147

Name of the Applicant : Noorunnisha. A

Functional Area : Finance

Proposed Title
A study on the price behaviour surrounding block transactions in equity market and
its impact on futures.

Need for the Research

The increase of competition among financial institutions in the post liberalization era
and the changes like growth in information technology, increase in stock exchanges, and
changing customer preferences made the trading of financial products and services more
dynamic. This in turn affect the pricing and behavior of stocks by creating price impact or
slippage.
Further, liberalization opened gates to financial institutions, enabling the stock
exchanges as a meeting place for gigantic corporates and miniscule retail investor who
collaborate to trade in large amount and often resort to block or bulk deals. A block deal is the
trading of minimum quantity of 5 lakhs shares or minimum value of rupees 5 crore through a
single window of stock exchange. It happens for 35 minutes in the beginning of trading
hours. On the contrary, a bulk trade accounts for more than 0.5 per cent of companys total
equity shares, traded by a single client code. It may happen through single or multiple
transactions without a time restriction. Block deals are said to increase the confidence of
investors. This does not necessarily indicate that a block or bulk deal in a particular scrip will
increase its price. However, in case of bulk deals taking place on regular basis in a counter or
share with high volumes and high pending shares it could be a sign of increase in price in the
future.
Hence a study on slippage (price impact) due to block deal may help investors and
financial analysts to figure out the functioning of permanent effect (informational) or
temporary effect (liquidity need) of price change. It may also unravel the institutional
behaviours towards scrips, role of stock exchange and stock broking firms in execution of
block trades, and informational efficiency of market. Therefore, the study attempts to
examine and understand the impact of block deals on the movement of price, the price
behavior surrounding the block deals, and the impact of block deals on their futures contracts.
Review of literature
There are many studies indicating the effect of block trades on price, futures and
index futures. Among those, the study of Holthausen, Leftwich and Mayers (1987) discloses
that block trades impact the price formation of scrips traded in capital market in two ways
such as through permanent price effect which is an information effect (Chan & Lakonishok,
1993) and through temporary effect which is the result of liquidity cost and price pressure
(Scholes, 1972). Subsequently, Agarwalla and Pandey (2010) analyzed price impacts of block
trades in the Indian stock market, and explored the price impacts of block trades and the price
behavior (return and volatility) surrounding the block trades. They did analysis using day
opening and closing price as equilibrium price before and after block trade and assessed the
price behaviour surrounding block trades through measuring of the returns and volatility of
stock price.
Frino and Oetomo (2005) identified that slippage increases with trade size. They
incorporated international futures market setting to test whether block trades incur total and
permanent price effects (slippage and information respectively) once controlled for normal
market behaviour and asymmetrical price effects between purchases and sales. Their analysis
stated that part of the initial price effect of futures trades is temporary and large buyer- and
seller-initiated trades have positive and negative permanent effects on prices, implying they
convey information.

Objectives
The following are the broad objectives:-
surrounding the block trades;
2
To analyze the permanent and temporary impact of block trades transacted;
3
To analyze the speed of market response to the information associated with
block trades;
4 To examine price behaviour surrounding block trades in futures contracts

Methodology
Two approaches can be incorporated to this study. First is the method followed by
Chan and Lakonishok (1993), and Aitken and Frino (1996) which estimated the impact of
block trades by comparing the block price with the equilibrium price before and after the
block trades. Second is transaction time event approach adopted by Houlthausen et.al
(1990). The study period will be from 2004 to 2015. The prices of scrips in NSE, which were
block traded and the prices of their futures contracts shall be used for analysis. Trade data
available 60 days prior and post to each block or bulk deals shall be used for identifying the
behavior surrounding such deals.

Expected results from analysis

The results of the study may be:-
1- Prices may revert back to original levels, indicating slippage is entirely a liquidity
cost.
2- Prices may exhibit a partial price reversal revealing slippage is part liquidity cost and
part information and
3- Prices may continue in the direction of the trade, suggesting strong information
effects. Hence, the study is expected to provide a preliminary analysis of slippage and
its
components: liquidity and information, in a selection of stock futures.
References
1. Agarwalla, S. K., & Pandey, A. (2010). Price Impact of Block Trades and Price
Behavior Surrounding Block Trades in the Indian Capital Market. Available at SSRN
1572997.
2. Aitken, M.J. and A. Frino. 1996. Asymmetry in stock returns following block trades
on the Australian Stock Exchange: A note. Abacus 32 54 61.
3. Chan, L., and J. Lakonishok. 1993. Institutional trades and intraday stock price
behavior. Journal of Financial Economics 33, 173 199.
4. Frino, A., and T. Oetomo, 2005, Slippage in Futures Markets: Evidence from the
Sydney Futures Exchange, The Journal of Futures Markets, 25(12), 1129-1146.
5. Holthausen, R., R. Leftwich, and D. Mayers. 1987. The effect of large block
transactions on security prices: A cross-sectional analysis. Journal of Financial
Economics 19, 237 268.
6. Houlthausen, R., R. Leftwich, and D. Mayers, 1990, Large-Block Transactions, the
Speed of Adjustment, and Temporary and Permanent Stock-Price Effects, Journal of
Financial Economics, 26, 71-95.
7. Scholes, M. S. 1972. The Market for Securities: Substitution versus Price Pressure
and the Effects of Information on Share Prices. The Journal of Business 45(2), 179-
211.
Web Link
http://articles.economictimes.indiatimes.com/2009-06-14/news/28392239_1_bulk-deals-cr-
shares-block
http://www.nseindia.com/products/content/equities/equities/bulk.htm