Informed Trading and the Price Effect of Block Trading Using Market Microstructure Models
Quarterly Journal of Securities Exchange

Quarterly Journal of Securities Exchange

Informed Trading and the Price Effect of Block Trading Using Market Microstructure Models

Document Type : Original Article

Authors
Reza Eivazlou 1
Mohammadreza Kowkabi 2
Farzad Rezaei 2
1 ,Assistant Professor Finance Department, Faculty of Accounting and Financial Sciences, Management Faculty of Tehran University, Tehran, Iran
2 MSc. in Finance, Faculty of Accounting and Financial Sciences, Management Faculty of Tehran University, Tehran, Iran.
10.22034/jse.2025.12489.2308
Abstract
Introduction: This study examines the use of private information by informed traders and the impact of block trades on stock price volatility in the Iranian Capital Market. Additionally, it explores whether insights from these trades can be used to predict future market volatility.

Methodology: To achieve these objectives, the Lee-Ready algorithm was applied to classify block trades into buys and sells, and the Probability of Informed Trading (PIN) model was employed to estimate the likelihood of informed trading. The sample included 34 companies among the top 50 on the Tehran Stock Exchange, analyzed between April 2022 and April 2023 on trading days with a minimum of 10 transactions. Intraday data during this period allowed for a more precise analysis of price movements.

Findings: Findings indicate that block purchases, especially by informed traders, exert a greater impact on stock price increases than block sales. Additionally, the correlation between permanent price effects and the probability of informed trading is stronger than with temporary or overall price effects, suggesting that private information has lasting price impacts. The study also reveals that price impacts are more significant during early trading hours, likely due to the release of new information.

Conclusion: Private information significantly influences price volatility, with informed traders capitalizing on this information for profit. These findings are important for market analysts and financial regulators, who may consider implementing regulatory measures to control the misuse of private information and to manage the effects of block trading on market volatility.
Keywords
price effect
possibility of informed trade
information asymmetry
market microstructure
block transactions
Subjects
Aitken, M; & Frino, A. (1996). Execution costs associated with institutional trades on the Australian Stock Exchange. Pacific-Basin Finance Journal, 4(1), 45–58. https://doi.org/10.1016/0927-538X(95)00030-5
Akay, O. O; Cyree, K. B; Griffiths, M. D; & Winters, D. B. (2012). What does PIN identify? Evidence from the T-bill Market. Journal of Financial Markets, 15(1), 29–42. https://doi.org/10.1016/j.finmar.2011.08.002
Alzahrani, A; Gregoriou, A; & Hudson, R. (2012). Can market frictions really explain the price impact asymmetry of block trades? Evidence from the Saudi stock market. Emerging Markets Review, 13, 202–209. https://doi.org/10.1016/j.ememar.2012.01.002
Alzahrani, A; Gregoriou, A; & Hudson, R. (2013). Price impact of block trades in the Saudi stock market. Journal of International Financial Markets, Institutions & Money, 23, 322–341. https://doi.org/10.1016/j.intfin.2012.10.007
Blau, B. M; Van Ness, B. F; & Van Ness, R. A. (2009). Intraday stealth trading: Which trades move prices during periods of high volume? Journal of Financial Research, 32(1), 1–21. https://doi.org/10.1111/j.1475-6803.2009.01235.x
Boehmer, E; Gramming, J; & Theissen, E. (2007). Estimating the probability of informed trading. Unpublished manuscript.
Chakravarty, S. (2001). Stealth-trading: Which traders' trades move stock prices? Journal of Financial Economics, 61(2), 289–307. https://doi.org/10.1016/S0304-405X(01)00062-X
Chan, L. K. C; & Lakonishok, J. (1995). The behavior of stock prices around institutional trades. The Journal of Finance, 50(4), 1147–1174. https://doi.org/10.1111/j.1540-6261.1995.tb04054.x
Chan, L. K. C; Jegadeesh, N; & Lakonishok, J. (1996). Momentum strategies. The Journal of Finance, 51(5), 1681–1713. https://doi.org/10.1111/j.1540-6261.1996.tb05222.x
Chen, Y; & Zhao, H. (2012). Informed trading, information uncertainty, and price momentum. Journal of Banking & Finance, 36(7), 2095–2109. https://doi.org/10.1016/j.jbankfin.2012.03.003
Chiyachantana, C. N; Jain, P. K; Jiang, C; & Wood, R. A. (2004). International evidence on institutional trading behavior and price impact. The Journal of Finance, 59(2), 869–898. https://doi.org/10.1111/j.1540-6261.2004.00645.x
Copeland, L; Wong, W. K; & Zeng, Y. (2006). Information-based trade in the Shanghai stock market. Global Finance Journal, 20(2), 180–190. https://doi.org/10.1016/j.gfj.2009.06.002
Daley, L. A; Hughes, J. S; & Rayburn, J. D. (1995). The impact of earnings announcements on the permanent price effects of block trades. Journal of Accounting Research, 33(2), 317–334. https://doi.org/10.2307/2491495
Demsetz, H. (1968). The cost of transacting. The Quarterly Journal of Economics, 82(1), 33–53. https://doi.org/10.2307/1882244
Dufour, A; & Engle, R. F. (2000). Time and the price impact of a trade. The Journal of Finance, 55(6), 2467–2498. https://doi.org/10.1111/0022-1082.00296
Easley, D; Hvidkjaer, S; & O’Hara, M. (2002). Is information risk a determinant of asset returns? The Journal of Finance, 57(5), 2185–2221. https://doi.org/10.1111/1540-6261.00493
Easley, D; Hvidkjaer, S; & O’Hara, M. (2010). Factoring information into returns. Journal of Financial and Quantitative Analysis, 45(2), 293–309. https://doi.org/10.1017/S0022109010000106
Easley, D; Kiefer, N. M; & O’Hara, M. (1997a). The information content of the trading process. Journal of Empirical Finance, 4(2–3), 159–186. https://doi.org/10.1016/S0927-5398(97)00002-4
Easley, D; Kiefer, N. M; & O’Hara, M. (1997b). One day in the life of a very common stock. The Review of Financial Studies, 10(3), 805–835. https://doi.org/10.1093/rfs/10.3.805
Easley, D; & O’Hara, M. (1987). Price, trade size, and information in securities markets. Journal of Financial Economics, 19(1), 69–90. https://doi.org/10.1016/0304-405X(87)90029-8
Eyvazlou, R; Raei, R; & Mohammadi, S. (2012). Calendar effects on the probability of trade based on insider information. Quarterly Journal of Stock Exchange, 17, 5–17. (In Persian). https://jse.ir/article_12345.html
Eyvazlou, R; Raei, R; & Rezaei, F. (2024). Stock market entry timing and retail investors' disposition effect. Financial Research Journal, 26(4), 940–962. https://doi.org/10.22059/frj.2024.378438.1007618. (In Persian).
Eyvazlou, R; Raei, R; & Rezaei, F. (2024). The role of market entry time in strengthening or weakening the investors' disposition effect. Financial Management Perspective, 14(46), 33–58. https://doi.org/10.48308/jfmp.2024.104904. (In Persian).
Frino, A; Mollica, V; & Walter, T. (2003). Asymmetric price behaviour surrounding block trades: A market microstructure explanation. Centre for Analytical Finance Working Paper Series, No. 154.
Frino, A; & Romano, M. G. (2010). Transaction costs and the asymmetric price impact of block trades. Unpublished working paper.
Glosten, L. R; & Harris, L. E. (1988). Estimating the components of the bid/ask spread. Journal of Financial Economics, 21(1), 123–142. https://doi.org/10.1016/0304-405X(88)90034-7
Holthausen, R. W; Leftwich, R. W; & Mayers, D. (1987). The effect of large block transactions on security prices: A cross-sectional analysis. Journal of Financial Economics, 19, 237–268. https://doi.org/10.1016/0304-405X(87)90015-8
Holthausen, R. W; Leftwich, R. W; & Mayers, D. (1990). Large-block transactions, the speed of response, and temporary and permanent stock-price effects. Journal of Financial Economics, 26(1), 71–95. https://doi.org/10.1016/0304-405X(90)90020-B
Ibikunle, G. (2015). Opening and closing price efficiency: Do financial markets need the call auction? Journal of International Financial Markets, Institutions & Money, 34, 208–227. https://doi.org/10.1016/j.intfin.2014.11.007
Jackson, D. (2013). Estimation PIN for firm with high levels of trading. Journal of Empirical Finance, 24, 116–120. https://doi.org/10.1016/j.jempfin.2013.09.001
John, K; & Lang, L. H. P. (1991). Insider trading around dividend announcements: Theory and evidence. The Journal of Finance, 46(4), 1361–1389. https://doi.org/10.1111/j.1540-6261.1991.tb04620.x
Karpoff, J. M. (1987). The relation between price changes and trading volume: A survey. The Journal of Financial and Quantitative Analysis, 22(1), 109–126. https://doi.org/10.2307/2330874
 
Quarterly Journal of Securities Exchange
Volume 18, Issue 71
Autumn 2025
Pages 27-76