The job of equity markets is to provide liquidity and price discovery. An efficient market will provide liquidity at a very low cost, and will adjust prices very quickly to respond to changes in demand.He goes on to mostly ignore the tension between the two.
Suppose you own a large block of stock and decide to sell it to build a deck on the back of your house. What should a well-functioning market do? I think most people in the field would say that a perfect market — in particular, a very liquid one — will allow you to sell it all quickly for very close to its current price. The purpose of the market, after all, is to allow you to buy and sell stocks when you want to, ideally in a cheap and efficient manner.
Now suppose you own a large block of stock and decide to sell it because you've found out that the CEO is laundering money for a drug cartel and most of the reported "profits" of the company are fraudulent. What should a well-functioning market do? I think most people in the field would say that a perfect market — in particular, one that is doing its price-discovery job well — should drop precipitously, incorporating the information that your trade conveys about the value of the stock into its price even before you finish trading — such that the last few shares you sell will be at a substantial discount to the earlier, less informed price.
Finally, suppose you own a large block of stock and decide to sell it. What should a well-functioning market do? Well, ideally it would know why you're selling. In practice the best you might expect is that some of the market participants to eventually get a sense of whether certain kinds of trades (placed at certain times of day, in certain size, perhaps in sequences of orders that seem connected to each other) are more likely to indicate that the price is too high than other kinds of trades, which mostly just mean that somebody lacks a back deck and wants one. If it gets pretty good at this, you might even hear the guy who got the scoop on the CEO's corruption complain about the "lack of liquidity" in the market; he might even badly abuse the term "front running". For more on that, go read Levine's column.
There is one more important wrinkle to add here, which is time-horizon. Suppose we're talking about a small cap stock that trades 50,000 shares a day, and you're trying to sell 100,000 shares (for deck-like reasons). You decide to break it up into smaller orders to sell over the course of two weeks. After you sell 10,000 shares the first day and 10,000 shares the next day, traders in the stock (such as there are) figure out that there's probably a bunch more sell orders coming over the next several days. Is that information about the value of the stock or isn't it?
Well, ideally again, perhaps someone would step in and do a block trade with you at (close to) the initial price. Insofar as the market isn't likely to be perfectly liquid, though, your trade can be expected to lower the price at least a bit, at least for a while. A trader with a time-horizon of months will regard this as a temporary "liquidation" that doesn't really concern the long-term (even months-long) value of the stock, but to a trader with a time-horizon of a day or two, "something's going to push the price down over the next day or two" is as informative as information comes.
So at this point the approximately ideal market with some first-order approximation of reality layered onto it probably drops a little bit for now, with the common expectation that it will bounce back in the next month or two, with the drop at such a size that some extra buyers are willing to come in and in some aggregate sense spread the sale out over the next few months, making a bit of extra profit on the deal, but small enough (and with a small enough expected attendant rebound) that you're willing to forego that "bit of extra profit" in order to get your hands on the cash now. On some level, perhaps you might as well call up Goldman Sachs and pay them the fee for doing a block trade with you.