Institutional Brokerage Networks: Facilitating Liquidity Provision
Review of Financial Studies, Forthcoming
60 Pages Posted: 30 Jul 2018 Last revised: 20 Mar 2024
Date Written: February 6, 2024
Abstract
We argue that institutional brokerage networks facilitate liquidity provision and mitigate the price impact of large non-information-motivated trades. Using commissions, we map trading networks of mutual funds (institutions) and their brokers. Central funds (institutions) tend to outperform their peripheral counterparts in terms of return gap (execution shortfall). This outperformance is more pronounced when funds experience large outflows and for large trades in less liquid stocks. Central brokers can deliver superior trade execution compared to peripheral brokers, but mainly for central institutions. We use the collapse of Lehman Brothers as a quasi-natural experiment to establish the likely causality of our findings.
Keywords: Institutional brokerage networks, mutual funds, return gap, trading costs, liquidity provision
JEL Classification: G14, G23, G24
Suggested Citation: Suggested Citation