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How Brokers Facilitate Trade for Long-Term Clients in Competitive Securities Markets

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  • Aitken, Michael J
  • Garvey, Gerald T
  • Swan, Peter L

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.

Suggested Citation

  • 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.
    • Handle: RePEc:ucp:jnlbus:v:68:y:1995:i:1:p:1-33
    DOI: 10.1086/296651
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    Cited by:

    1. Desgranges, Gabriel & Foucault, Thierry, 2005. "Reputation-based pricing and price improvements," Journal of Economics and Business, Elsevier, vol. 57(6), pages 493-527.
    2. Ainsworth, Andrew & Lee, Adrian D., 2014. "Waiting costs and limit order book liquidity: Evidence from the ex-dividend deadline in Australia," Journal of Financial Markets, Elsevier, vol. 20(C), pages 101-128.
    3. Aitken, Michael & Frino, Alex, 1996. "The accuracy of the tick test: Evidence from the Australian stock exchange," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1715-1729, December.
    4. Brown, Philip & Thomson, Nathanial & Walsh, David, 1999. "Characteristics of the order flow through an electronic open limit order book," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(4), pages 335-357, November.
    5. Michail Anthropelos & Scott Robertson & Konstantinos Spiliopoulos, 2021. "Optimal investment, derivative demand, and arbitrage under price impact," Mathematical Finance, Wiley Blackwell, vol. 31(1), pages 3-35, January.
    6. deB. Harris, Frederick H. & McInish, Thomas H. & Wood, Robert A., 2002. "Security price adjustment across exchanges: an investigation of common factor components for Dow stocks," Journal of Financial Markets, Elsevier, vol. 5(3), pages 277-308, July.
    7. Aitken, Michael & Frino, Alex, 1996. "Execution costs associated with institutional trades on the Australian Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 4(1), pages 45-58, May.
    8. Michael A. Goldstein & Paul Irvine & Eugene Kandel & Zvi Wiener, 2009. "Brokerage Commissions and Institutional Trading Patterns," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5175-5212, December.
    9. Michael Aitken & Niall Almeida & Frederick H. deB. Harris & Thomas H. McInish, 2008. "Financial analysts and price discovery," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 1-24, March.
    10. Michail Anthropelos & Scott Robertson & Konstantinos Spiliopoulos, 2018. "Optimal Investment, Demand and Arbitrage under Price Impact," Papers 1804.09151, arXiv.org, revised Dec 2018.
    11. W. Yang, 1999. "The Demand for and Supply of Shares. An Empirical Study of the Limit Order Book on the ASX," Economics Discussion / Working Papers 99-03, The University of Western Australia, Department of Economics.
    12. Gabre-Madhin, Eleni Z., 1999. "Transaction costs and market institutions," MTID discussion papers 31, International Food Policy Research Institute (IFPRI).

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