Institutional Trading Frictions

48 Pages Posted: 20 Oct 2008 Last revised: 12 Nov 2013

See all articles by Chiraphol N. Chiyachantana

Chiraphol N. Chiyachantana

Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Date Written: May 29, 2009

Abstract

We propose and empirically examine a comprehensive measure of institutional trading frictions to include the dimensions of price impact, quantity of execution, return dynamics, speed of execution or order splitting, and trading commissions. Our empirical analysis reveals that various hidden components of institutional trading frictions such as adverse selection and clean-up costs are persistent and could add significantly to previously measured directly observable components of transaction costs. Our simultaneous system of equations accounts for the endogeniety in institutional order aggressiveness based on potentially superior information as well as order splitting strategies in the implementation stage to reduce transaction costs. Order aggressiveness, market conditions and other stock characteristics are associated with significant variations in trading frictions.

Keywords: Institutional trading, implementation shortfall, adverse selection, clean-up costs, price impact, transaction costs

JEL Classification: G14, G15, G20, G24

Suggested Citation

Chiyachantana, Chiraphol N. and Jain, Pankaj K., Institutional Trading Frictions (May 29, 2009). Available at SSRN: https://ssrn.com/abstract=1287215 or http://dx.doi.org/10.2139/ssrn.1287215

Chiraphol N. Chiyachantana

Singapore Management University ( email )

Lee Kong Chian School of Business
50 Stamford Road
Singapore, 178899
Singapore
65-6828-0776 (Phone)
65-6828-0427 (Fax)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Pankaj K. Jain (Contact Author)

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

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