Not Available for Download

Brokerage Commissions and Institutional Trading Patterns

Posted: 24 Nov 2009  

Michael A. Goldstein

Babson College - Finance Division

Paul J. Irvine

Neeley School of Business

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: December 2009

Abstract

The institutional brokerage industry faces an ever-increasing pressure to lower trading costs, which has already driven down average commissions and shifted volume toward 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 trades from 1999 to 2003. We find that institutions negotiate commissions infrequently, and thus commissions vary little with trade 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 over time, are 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 informal predictions about future developments in the industry.

Keywords: G23, G24

Suggested Citation

Goldstein, Michael A. and Irvine, Paul J. and Kandel , Eugene and Wiener, Zvi, Brokerage Commissions and Institutional Trading Patterns (December 2009). The Review of Financial Studies, Vol. 22, Issue 12, pp. 5175-5212, 2009. Available at SSRN: https://ssrn.com/abstract=1509903 or http://dx.doi.org/hhp083

Michael A. Goldstein (Contact Author)

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

Paper statistics

Abstract Views
525