Institutional Brokerage Networks: Facilitating Liquidity Provision

62 Pages Posted: 30 Jul 2018 Last revised: 15 Feb 2020

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: February 9, 2020

Abstract

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

Han, Munhee and Kim, Sanghyun (Hugh) and Nanda, Vikram K., Institutional Brokerage Networks: Facilitating Liquidity Provision (February 9, 2020). 29th Annual Conference on Financial Economics & Accounting 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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