The Trading of Institutional Investors: Theory and Evidence
Journal of Applied Finance, Vol. 12, No. 1, Spring/Summer
Posted: 6 Jun 2002
The evidence on institutional investors' trading behavior during the 1990s is broadly consistent with those investors seeking to reduce execution costs. Specifically, institutional investors break up large orders into smaller trades; the nature of the break-up depends in part on characteristics of the order and the liquidity of the market for the security. We extend the analysis of execution costs to a period in which the market is declining sharply and the number and type of trading platforms were increasing substantially. Average execution costs and execution strategy in the sample do not differ substantially from those observed in earlier periods. Our conclusion is that cross-sectional differences in trading ability are much more important than the external market environment in the determination of execution costs. We speculate that the importance of this ability will increase as the complexity of trading mechanisms increases.
JEL Classification: G100, G200
Suggested Citation: Suggested Citation