How Brokers Facilitate Trade for Long-Term Clients in Competitive Securities Markets
Abstract
In adverse-selection models of security market microstructure, a market maker could enhance efficiency if he or she were willing to sustain short-term trading losses. We show that this desirable activity can be supported as a self-enforcing agreement between broker-dealers and long-lived clients. An implication is that brokers who sustain such losses should charge higher fees to long-term clients for trades where the broker merely receives a commission. This prediction is supported by an analysis of brokerage rates on the Australian Stock Exchange. By contrast, market makers who make trading profits charge lower agency fees to large, long-term clients. Copyright 1995 by University of Chicago Press.Download Info
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Bibliographic Info
Article provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 68 (1995)
Issue (Month): 1 (January)
Pages: 1-33
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Handle: RePEc:ucp:jnlbus:v:68:y:1995:i:1:p:1-33
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Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Gabre-Madhin, Eleni Z., 1999. "Transaction costs and market institutions," MTID discussion papers 31, International Food Policy Research Institute (IFPRI).
- Michael Goldstein & Paul Irvine & Eugene Kandel & Zvi Wiener, 2004.
"Brokerage Commissions and Institutional Trading Patterns,"
Discussion Paper Series
dp356, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem.
- Michael A. Goldstein & Paul Irvine & Eugene Kandel & Zvi Wiener, 2009. "Brokerage Commissions and Institutional Trading Patterns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(12), pages 5175-5212, December.
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