Institutional Brokerage Networks: Facilitating Liquidity Provision
62 Pages Posted: 30 Jul 2018 Last revised: 15 Feb 2020
Date Written: February 9, 2020
We argue that institutional brokerage networks facilitate liquidity provision and mitigate price impact of large non-information motivated trades. Using commission payments, we map trading networks of mutual funds and brokers. We find central funds outperform peripheral funds, especially as measured by return gap. The outperformance is more pronounced when trading is primarily liquidity-driven. The centrality premium is strengthened by brokers' incentives to generate greater revenues and their repeated interactions with funds. By merging daily transactions with quarterly holdings, we confirm that centrality premium is driven by reduced trading costs, rather than higher interim (intra-quarter) trading performance or profitable information from brokers.
Keywords: institutional brokerage networks, mutual funds, return gap, trading costs, liquidity provision
JEL Classification: G14, G23, G24
Suggested Citation: Suggested Citation