Brokerage Commissions and Institutional Trading Patterns
AbstractThe 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: firstname.lastname@example.org, Oxford University Press.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 22 (2009)
Issue (Month): 12 (December)
Contact details of provider:
Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Web page: http://www.rfs.oupjournals.org/
More information through EDIRC
Other versions of this item:
- Michael Goldstein & Paul Irvine & Eugene Kandel & Zvi Wiener, 2004. "Brokerage Commissions and Institutional Trading Patterns," Discussion Paper Series dp356, The Center for the Study of Rationality, Hebrew University, Jerusalem.
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Berkowitz, Stephen A & Logue, Dennis E & Noser, Eugene A, Jr, 1988. " The Total Cost of Transactions on the NYSE," Journal of Finance, American Finance Association, vol. 43(1), pages 97-112, March.
- Dimitri Vayanos, 1998. "Transaction costs and asset prices : a dynamic equilibrium model," LSE Research Online Documents on Economics 451, London School of Economics and Political Science, LSE Library.
- Jennifer S. Conrad, 2001. "Institutional Trading and Soft Dollars," Journal of Finance, American Finance Association, vol. 56(1), pages 397-416, 02.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- Kavajecz, Kenneth A. & Keim, Donald B., 2005. "Packaging Liquidity: Blind Auctions and Transaction Efficiencies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(03), pages 465-492, September.
- Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August.
- Holmstrom, Bengt & Milgrom, Paul, 1987.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Econometric Society, vol. 55(2), pages 303-28, March.
- Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
- Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
- Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, March.
- Aitken, Michael J & Garvey, Gerald T & Swan, Peter L, 1995. "How Brokers Facilitate Trade for Long-Term Clients in Competitive Securities Markets," The Journal of Business, University of Chicago Press, vol. 68(1), pages 1-33, January.
- Brennan, Michael J & Chordia, Tarun, 1993. " Brokerage Commission Schedules," Journal of Finance, American Finance Association, vol. 48(4), pages 1379-1402, September.
- Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 1-58.
- Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
- Lawrence R. Glosten & Paul R. Milgrom, 1983.
"Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders,"
570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
- Elton, Edwin J & Gruber, Martin J & Grossman, Seth, 1986. " Discrete Expectational Data and Portfolio Performance," Journal of Finance, American Finance Association, vol. 41(3), pages 699-713, July.
- Jenkinson, Tim & Ljungqvist, Alexander, 2001. "Going Public: The Theory and Evidence on How Companies Raise Equity Finance," OUP Catalogue, Oxford University Press, edition 2, number 9780198295990.
- Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, vol. 33(2), pages 173-199, April.
- 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.
- 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.
- 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.
- Hu, Gang, 2009. "Measures of implicit trading costs and buy-sell asymmetry," Journal of Financial Markets, Elsevier, vol. 12(3), pages 418-437, August.
- Kedia, Simi & Zhou, Xing, 2011. "Local market makers, liquidity and market quality," Journal of Financial Markets, Elsevier, vol. 14(4), pages 540-567, November.
- 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.
- Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2012.
"Sunshine Trading: Flashes of Trading Intent at the NASDAQ,"
Tinbergen Institute Discussion Papers
12-141/IV/DSF47, Tinbergen Institute.
- Johannes A. Skjeltorp & Elvira Sojli & Wing Wah Tham, 2011. "Sunshine trading: Flashes of trading intent at the NASDAQ," Working Paper 2011/17, Norges Bank.
- Edelen, Roger M. & Kadlec, Gregory B., 2012. "Delegated trading and the speed of adjustment in security prices," Journal of Financial Economics, Elsevier, vol. 103(2), pages 294-307.
- repec:dgr:uvatin:2012141 is not listed on IDEAS
- Fernando, Chitru S. & Gatchev, Vladimir A. & Spindt, Paul A., 2010. "Institutional Ownership, Analyst Following and Share Prices," Working Papers 10-07, University of Pennsylvania, Wharton School, Weiss Center.
- Edward W. Sun & Timm Kruse, 2013. "Economic Modeling for Optimal Trading of Financial Asset in Volatile Market," Economics Bulletin, AccessEcon, vol. 33(3), pages 1788-1795.
- Edelen, Roger M. & Evans, Richard B. & Kadlec, Gregory B., 2012. "Disclosure and agency conflict: Evidence from mutual fund commission bundling," Journal of Financial Economics, Elsevier, vol. 103(2), pages 308-326.
- 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.
- Anand, Amber & Irvine, Paul & Puckett, Andy & Venkataraman, Kumar, 2013. "Institutional trading and stock resiliency: Evidence from the 2007–2009 financial crisis," Journal of Financial Economics, Elsevier, vol. 108(3), pages 773-797.
- Busse, Jeffrey A. & Clifton Green, T. & Jegadeesh, Narasimhan, 2012. "Buy-side trades and sell-side recommendations: Interactions and information content," Journal of Financial Markets, Elsevier, vol. 15(2), pages 207-232.
- Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2013. "ETF arbitrage: Intraday evidence," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3486-3498.
- 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.
- Fernando, Chitru S. & Gatchev, Vladimir A. & Spindt, Paul A., 2012. "Institutional ownership, analyst following, and share prices," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2175-2189.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.