The role of the CAC system and the block market in the provision of liquidity on the Paris Stock Exchange.

Summary For a long time, the principle of the centralized order-driven market was the only reference for the organization of transactions. However, the success of alternative trading systems (price-driven markets and private trading systems) since the 1970s has shown the inadequacy of traditional structures for the new requirements arising from the institutionalization of markets. Too rigid, too transparent, insufficiently liquid, these structures seem to be synonymous with high transaction costs for investors who have to make large trades. Based on this observation, structures such as the NYSE or the Paris Stock Exchange have set up a block market in order to offer institutional investors trading conditions that are better adapted to their needs. Thus, block markets are supposed to provide additional liquidity to the centralized structures that they complement. The purpose of the work presented here is to study the reality of this contribution in the case of the non-CAC block market on the Paris stock exchange. The study shows that this compartment captures only a small share, about 10 to 15%, of transactions reaching the normal block size, the rest being the responsibility of the CAC. Several phenomena can explain this result. If transaction costs on the CAC system (price range, temporary and permanent effects of orders on prices) are an increasing function of the number of securities traded because of the private information contained in the orders, investors, by trading strategically, can at the same time minimize the impact of their transactions on prices. The anonymity and speed of execution provided by the CAC system also seem to be factors appreciated by investors. Finally, the non-CAC market would only be of interest to agents who can credibly report the uninformed nature of their demand.