Best Execution: Can Institutional and Retail Investors Benefit from Fast and Fragmented Trading?

50 Pages Posted: 22 Jan 2016 Last revised: 2 Feb 2016

See all articles by Michał Dzieliński

Michał Dzieliński

Stockholm Business School, Stockholm University

Björn Hagströmer

Stockholm University - Stockholm Business School

Lars L. Norden

Stockholm University - Stockholm Business School

Date Written: January 21, 2016

Abstract

Fast trading and fragmentation of volume make equity markets complex, leading retail and institutional investors to demand sophisticated brokerage services. In a sample of stock transactions in Swedish large-cap firms, we find that brokers who show high trading sophistication when trading their own book do not deliver comparable execution quality when trading on behalf of clients. Best execution legislation states that brokers should take all reasonable steps to maximize the execution quality when trading on behalf of clients. For institutional clients, the shortcoming in execution quality is primarily driven by brokers' inability to route the transactions to the trading venue with the best price. For retail clients, in contrast, the shortcoming is due to poor liquidity timing and a strong reliance on active executions. Only institutional block trades benefit from execution by sophisticated brokers.

Keywords: execution quality, smart order routing, market timing, institutional investors, effective spread, implementation shortfall

JEL Classification: G10, G14, G15, G18

Suggested Citation

Dzieliński, Michał and Hagströmer, Björn and Nordén, Lars L., Best Execution: Can Institutional and Retail Investors Benefit from Fast and Fragmented Trading? (January 21, 2016). Asian Finance Association (AsianFA) 2016 Conference. Available at SSRN: https://ssrn.com/abstract=2719520 or http://dx.doi.org/10.2139/ssrn.2719520

Michał Dzieliński

Stockholm Business School, Stockholm University ( email )

Kräftriket 7
Stockholm, 106 91
Sweden

HOME PAGE: http://www.sbs.su.se/en/

Björn Hagströmer

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

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