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Brokerage Commissions and Institutional Trading Patterns

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  • Michael Goldstein
  • Paul Irvine

    ()

  • Eugene Kandel

    ()

  • Zvi Wiener

Abstract

Why do brokers charge per-share commissions to institutional traders? What determines the commission charge? We examine commissions and order flow for a sample of institutional orders and find that most per-share commissions are concentrated at only a few price points, primarily 5 and 6 cents per share. Further, we find that the prior-period commission, rather than execution costs, is the strongest determinant of next period's commission. These results are inconsistent with negotiation of commissions on an order-by-order basis or with the impression of a continuous transaction cost that is deduced from the distribution of percentage commissions, suggesting that commissions are not a marginal cost of execution. We also find that institutional clients concentrate their order flow with a small set of brokers, and that small institutions concentrate more than large institutions. Collectively, our results suggest that brokers and their institutional clients enter into long-term agreements where the per-share commission is constant, and the order flow routed to a particular broker is used to maintain the required payment for an institution's desired level of service. Commissions, therefore, constitute a convenient way of charging a predetermined fixed fee for broker services.

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Bibliographic Info

Paper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp356.

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Length: 51 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:huj:dispap:dp356

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Citations

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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. Kedia, Simi & Zhou, Xing, 2011. "Local market makers, liquidity and market quality," Journal of Financial Markets, Elsevier, vol. 14(4), pages 540-567, November.
  5. 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.
  6. 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.
  7. 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.
  8. Hu, Gang, 2009. "Measures of implicit trading costs and buy-sell asymmetry," Journal of Financial Markets, Elsevier, vol. 12(3), pages 418-437, August.
  9. 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.
  10. 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.
  11. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2013. "ETF arbitrage: Intraday evidence," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3486-3498.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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.
  18. 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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