PRICE IMPACTS OF BLOCK TRADING ON THE NEW YORK STOCK EXCHANGE

IN AN EFFICIENT market, prices reflect underlying values. This insures the proper allocation of new funds to the most productive areas of the economy. Additionally, individual investors benefit by knowing that prices at which they trade are not subject to forces which have little or nothing to do with the underlying value of the company. Extensive empirical tests which tend to support the efficiency of the stock market have been carried out in the past.' Until recently, however, no tests have been carried out to assess directly the impact of institutional investors on the efficiency of the stock market.2 The purpose of this paper is to examine the extent to which block trading by institutional investors contributes to or detracts from efficient markets. A block trade can be defined as a transaction involving a larger number of shares than can readily be handled in the normal course of the auction market.