Institutional Brokerage Networks: Facilitating Liquidity Provision
68 Pages Posted: 30 Jul 2018 Last revised: 30 Aug 2019
Date Written: July 13, 2019
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: Suggested Citation