Bridge over ocean
1 March 1984 Financial Analysts Journal Volume 40, Issue 2

Block Trading and Aggregate Stock Price Volatility

  1. Frank K. Reilly, CFA
  2. David J. Wright

The substantial increase in institutional trading over the last decade has been paralleled by an increase in block trading (i.e., trades of 10,000 shares or more). Not a few market observers fear that these developments have adversely affected market liquidity and increased stock price volatility. Block trading, they argue, causes liquidity problems for the specialist; furthermore, parallel trades by institutions and the possibility of institutions trading on superior information may be expected to increase stock price volatility.

A macroanalysis of the relation between block trading and aggregate stock price volatility indicates strongly that block trading—either as a percentage of total trading volume or as the total number of shares traded in blocks—does not increase price volatility. In fact, most of the significant results suggest a negative relationship. Apparently, greater institutional involvement, as measured by the degree of block trading, enhances liquidity. The evidence does, however, suggest a positive relation between total trading volume and volatility.

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