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.