How Broker Ability Affects Institutional Trading Costs PDF Download
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Author: Alex Frino
Publisher:
ISBN:
Category :
Languages : en
Pages : 27
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Book Description
This paper demonstrates that broker research and trade execution ability has a significant impact on the cost of institutional trading. The results reveal that there is significant variation in the ability of brokers to control execution costs. Trades executed by brokers with stronger research ability exhibit a higher permanent price impact while those executed by brokers with better execution ability exhibit a lower temporary price impact. Brokers are also found to specialise on an industry level which gives rise to variation in ability within a brokerage house.
Author: Alex Frino
Publisher:
ISBN:
Category :
Languages : en
Pages : 27
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Book Description
This paper demonstrates that broker research and trade execution ability has a significant impact on the cost of institutional trading. The results reveal that there is significant variation in the ability of brokers to control execution costs. Trades executed by brokers with stronger research ability exhibit a higher permanent price impact while those executed by brokers with better execution ability exhibit a lower temporary price impact. Brokers are also found to specialise on an industry level which gives rise to variation in ability within a brokerage house.
Author: Munhee Han
Publisher:
ISBN:
Category : Brokers
Languages : en
Pages :
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Book Description
This dissertation consists of two essays in financial economics. Two essays are in the areas of institutional investors and market mircrostructure. The first essay, included in Chapter 2, studies order submission strategies by institutional investors when trading on private information. By merging institutional daily transactions with original/confidential 13F filings, I separate informed trades from uninformed ones. Informed large orders tend to be split across more brokers and over more days. While same brokers tend to work uninformed large orders over multiple days, the brokers who facilitated early parts of broken-up informed orders rarely receive the remaining parts of the same orders on later days. Institutional investors also provide camouflage for their informed orders by mixing an informed order with other uninformed orders simultaneously sent to the same broker. As a result, a higher degree of shuffling a portfolio of orders is associated with a larger share of informed trading volume. The splitting and shuffling strategies designed to conceal informed trades from brokers and other market participants tend to lower institutional trading costs, especially on informed orders. The second essay, included in Chapter 3 and co-authored with Sanghyun (Hugh) Kim and Vikram Nanda, investigates how institutional brokerage networks of mutual funds can affect their trading performance, especially as measured by the return gap. We argue that institutional brokerage networks facilitate liquidity provision and mitigate price impact of large non-information motivated trades. Using commission payments, we map trading networks of mutual funds and brokers. We find central funds outperform peripheral funds, especially as measured by return gap. The outperformance is more pronounced when trading is primarily liquidity-driven. The centrality premium is strengthened by brokers’ incentives to generate greater revenues and their repeated interactions with funds. By merging daily transactions with quarterly holdings, we confirm that centrality premium is driven by reduced trading costs, rather than higher interim (intra-quarter) trading performance or profitable information from brokers.
Author: Donald B. Keim
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper examines the empirical evidence on the cost of equity trades for institutional investors. There is considerable practical and academic interest in the measurement and analysis of trading costs. We discuss some of the results that emerge from the recent literature on institutional trading costs and augment those finding with new evidence from a large sample of institutional trades. The evidence we discuss includes: (i) implicit trading costs (such as the price impact of a trade and the opportunity costs of failing to execute) are economically significant relative to explicit costs (and relative to realized portfolio returns); (ii) equity trading costs vary systematically with trade difficulty and order placement strategy; (iii) differences in market design, investment style, trading ability, and reputation are also important determinants of trading costs; (iv) even controlling for trade complexity, there is considerable variation in trading costs across institutions; (v) accurate prediction of trading costs requires more detailed data on the entire order submission process, especially information on pre-trade decision variables such as the trading horizon. We also discuss the implications of equity trading costs for policy makers and investors. For example, the concept of quot;best executionquot; is difficult to measure and, therefore, enforce for institutional investors.
Author: Paul J. Irvine
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
The institutional brokerage industry faces ever increasing pressure to lower trading costs, which has already driven down average commissions and shifted volume towards 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 orders from 1999-2003. We find that institutions negotiate commissions infrequently, and thus commissions vary little with order 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, 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 predictions about the future developments in the industry.
Author: Amber Anand
Publisher:
ISBN:
Category :
Languages : en
Pages : 64
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Book Description
Using a proprietary dataset of institutional investors' equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. We find that trading desk skill is positively correlated with the performance of the institution's traded portfolio, suggesting that institutions that invest resources in developing execution abilities also invest in generating superior investment ideas. Although some brokers can deliver better executions consistently over time, our analysis suggests that trading desk skill is not limited to a selection of better brokers. We conclude that the trade implementation process is economically important and can contribute to relative portfolio performance.
Author: Donald B. Keim
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We examine the magnitude and determinants of execution costs associated with institutional equity trades and their effect on investment performance. Using detailed information on over $83 billion of recent equity transactions by 21 institutions, we analyze the major components of execution costs, including explicit and implicit costs. We find that execution costs are significantly related to trade size, exchange listing, and the traded stock's market capitalization. We also find that buyer-initiated trades are more costly than equivalent seller-initiated trades. Our results indicate that execution costs have a significant effect on performance over short horizons, and there is significant variation in trading costs and performance across institutions, reflecting differences in trading ability and style. The results provide a way to assess various trading strategies and to form benchmarks to evaluate portfolio managers.
Author: Yvonne Klemm
Publisher:
ISBN:
Category :
Languages : en
Pages : 56
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Book Description
Author: Jennifer S. Conrad
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Using proprietary data, we examine institutional orders and trades filled by alternative electronic trading systems. Our data consist of almost 800,000 orders (corresponding to 2.15 million trades) worth approximately $1.6 trillion, between the first quarter of 1996 and the first quarter of 1998. These data allow us to distinguish between orders filled by day and after-hours crossing systems, electronic communication networks (ECNs) and traditional brokers. We find that crossing systems are used largely to execute orders in listed stocks, while ECNs concentrate in Nasdaq stocks. On average, broker-filled orders are larger, have longer duration, and higher fill rates than orders executed by alternative trading systems. Controlling for variation in order characteristics, difficulty, and endogeneity in the choice of trading venue, we find that realized execution costs are generally lower on crossing systems and ECNs. Order handling rules and tick size changes implemented in 1997 appear to reduce the cost advantage of trading on ECNs. Our results shed light on the emergence of alternative electronic trading systems that provide significant competition for order flow, for both exchanges and dealer markets.
Author: Eleni Zaude Gabre-Madhin
Publisher: Intl Food Policy Res Inst
ISBN: 089629126X
Category : Business & Economics
Languages : en
Pages : 116
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Book Description
This report addresses the overarching question regarding the role of institutions in enhancing market development following market reforms. It uses the New Institutional Economics framework to empirically analyze the role of a specific market institution, that of brokers acting as intermediaries to match traders in the Ethiopian grain market in reducing the transaction costs of search faced by traders. Brokers play a key role in facilitating exchange in a weak marketing environment where limited public market information, the lack of grain standardization, oral contracts, and weak legal enforcement of contracts increase the risk of contract failure. Relying on primary data, it analyzes traders' microeconomic behavior, social capital, the nature and extent of their transaction costs, and the norms and rules governing the relationship between brokers and traders.The study uses an innovative approach to quantify the costs of search and demonstrates that the brokerage institution is economically efficient both for individual traders and for global economic welfare.
Author: Gregory W. Eaton
Publisher:
ISBN:
Category :
Languages : en
Pages : 63
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Book Description
Using proprietary institutional trade data, we construct a price impact measure that represents the costs faced by institutional investors. We show that many widely used liquidity measures do not adequately capture institutional trading costs. We then find that institutional trading costs are not dramatically impacted by decimalization, casting doubt on the widely used identification strategy that employs decimalization as an exogenous shock to liquidity, particularly institutional liquidity. Indeed, we find that conclusions from prior research are significantly altered when we measure liquidity using institutional trading data.
