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Brokerage Commissions and Institutional Trading Patterns

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Author Info

  • Michael A. Goldstein
  • Paul Irvine
  • Eugene Kandel
  • Zvi Wiener

Abstract

The institutional brokerage industry faces an ever-increasing pressure to lower trading costs, which has already driven down average commissions and shifted volume toward low-cost execution venues. However, traditional full-service brokers that bundle execution with services remain a force and their commissions are still considerably higher than the marginal cost of trade execution. We hypothesize that commissions constitute a convenient way of charging a prearranged fixed fee for long-term access to a broker's premium services. We derive testable predictions based on this hypothesis and test them on a large sample of institutional trades from 1999 to 2003. We find that institutions negotiate commissions infrequently, and thus commissions vary little with trade characteristics. Institutions also concentrate their order flow with a relatively small set of brokers, with smaller institutions concentrating their trading more than large institutions and paying higher per-share commissions. These results are stable over time, are consistent with our predictions, and cannot be explained by cost-minimization alone. Finally, we discuss the evolution of the institutional brokerage market within the proposed framework and make informal predictions about future developments in the industry. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 22 (2009)
Issue (Month): 12 (December)
Pages: 5175-5212

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Handle: RePEc:oup:rfinst:v:22:y:2009:i:12:p:5175-5212

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Citations

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Cited by:
  1. Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2011. "Sunshine trading: Flashes of trading intent at the NASDAQ," Working Paper 2011/17, Norges Bank.
  2. Kedia, Simi & Zhou, Xing, 2011. "Local market makers, liquidity and market quality," Journal of Financial Markets, Elsevier, vol. 14(4), pages 540-567, November.
  3. Niehaus, Greg & Zhang, Donghang, 2010. "The impact of sell-side analyst research coverage on an affiliated broker's market share of trading volume," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 776-787, April.
  4. David Morton de Lachapelle & Damien Challet, 2009. "Turnover, account value and diversification of real traders: evidence of collective portfolio optimizing behavior," Papers 0912.4723, arXiv.org, revised Jun 2010.
  5. Alexander, Gordon J. & Peterson, Mark A., 2007. "An analysis of trade-size clustering and its relation to stealth trading," Journal of Financial Economics, Elsevier, vol. 84(2), pages 435-471, May.
  6. Hu, Gang, 2009. "Measures of implicit trading costs and buy-sell asymmetry," Journal of Financial Markets, Elsevier, vol. 12(3), pages 418-437, August.
  7. Qin Lei & Murli Rajan & Xuewu Wang, 2012. "An empirical analysis of corporate insiders' trading performance," China Finance Review International, Emerald Group Publishing, vol. 2(3), pages 246-264, June.
  8. Lipson, Marc L. & Mortal, Sandra, 2006. "The effect of stock splits on clientele: Is tick size relevant?," Journal of Corporate Finance, Elsevier, vol. 12(5), pages 878-896, December.
  9. Anand, Amber & Chakravarty, Sugato & Chuwonganant, Chairat, 2009. "Cleaning house: Stock reassignments on the NYSE," Journal of Financial Markets, Elsevier, vol. 12(4), pages 727-753, November.
  10. Green, T. Clifton & Jame, Russell, 2011. "Strategic trading by index funds and liquidity provision around S&P 500 index additions," Journal of Financial Markets, Elsevier, vol. 14(4), pages 605-624, November.

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