Brokerage Commissions and Institutional Trading Patterns
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.
|Date of creation:||Apr 2004|
|Date of revision:|
|Contact details of provider:|| Postal: Feldman Building - Givat Ram - 91904 Jerusalem|
Web page: http://www.ratio.huji.ac.il/
More information through EDIRC
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.:
- Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, 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.
- Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
- 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.
- 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.
- Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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, December.
- Brennan, Michael J & Chordia, Tarun, 1993. " Brokerage Commission Schedules," Journal of Finance, American Finance Association, vol. 48(4), pages 1379-1402, September.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:huj:dispap:dp356. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tomer Siedner)
If references are entirely missing, you can add them using this form.