Can market frictions really explain the price impact asymmetry of block trades? Evidence from the Saudi Stock Market

We empirically examine the price impact of block trades, in the Saudi Stock Market over the time period of 2005-2008. Using a unique dataset of intraday data consisting of 2.3 million block buys and 1.9 million block sales, we find an asymmetry in the price impact of block purchases and sales. The asymmetry persists even when we account for the bid-ask bias in block trades, which is contrary to the previous literature. Overall, our findings suggest that in an emerging market where institutional trading is relatively scarce, market microstructure cannot explain the asymmetry in the price impact of large trades.

► First study to examine price impact asymmetry of large trades in an emerging market. ► Our results suggest that market frictions do not fully incorporate the information asymmetry present within block transactions in emerging equity markets. ► This implies that the electronic limit order book system may not be the optimal trading mechanism for emerging markets. ► Our findings have implications for all other emerging markets, because given their infancy institutional trades are only a small element of equity markets. As a result of this emerging markets may require a dealership system to improve the quality of their equity markets.