Institutional Brokerage Networks: Facilitating Liquidity Provision

68 Pages Posted: 30 Jul 2018 Last revised: 30 Aug 2019

See all articles by Munhee Han

Munhee Han

University of Texas at Dallas - Naveen Jindal School of Management

Sanghyun (Hugh) Kim

University of Texas at Dallas - Naveen Jindal School of Management

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: July 13, 2019

Abstract

We argue institutional brokerage networks facilitate liquidity provision and mitigate price impact of large non-information motivated trades. We use commission payments to map trading networks of mutual-funds and brokers. We find central-funds outperform peripheralfunds, especially in terms of return gap. Outperformance is more pronounced when trading is primarily liquidity driven to accommodate large redemptions. This fund–centrality premium is enhanced by brokers’ incentives to generate greater commissions and by trading relationships between brokers and funds. Exploiting large brokerage mergers as exogenous shocks to network structure, we show that shocks to network centrality are accompanied by predicted changes in return gap.

Keywords: institutional brokerage networks, mutual funds, return gap, trading costs, liquidity provision

JEL Classification: G14, G23, G24

Suggested Citation

Han, Munhee and Kim, Sanghyun (Hugh) and Nanda, Vikram K., Institutional Brokerage Networks: Facilitating Liquidity Provision (July 13, 2019). 29th Annual Conference on Financial Economics & Accounting 2018; 31st Australasian Finance and Banking Conference 2018. Available at SSRN: https://ssrn.com/abstract=3221946 or http://dx.doi.org/10.2139/ssrn.3221946

Munhee Han

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Sanghyun (Hugh) Kim (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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