The Role of Reputation in Financial Markets: The Impact of Broker Dark Pool Scandals on Institutional Order Routing

67 Pages Posted: 3 Aug 2022 Last revised: 20 May 2024

See all articles by Robert H. Battalio

Robert H. Battalio

University of Notre Dame - Department of Finance

Shane A. Corwin

University of Notre Dame - Mendoza College of Business

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance

Antonino Emanuele Rizzo

Nova School of Business and Economics

Rafael Zambrana

University of Notre Dame - Mendoza College of Business

Date Written: May 20, 2024

Abstract

Utilizing commission data from a large sample of institutional investors, we examine investor reactions to scandals involving broker-operated dark pools. When a breach of trust becomes public, both mutual funds and pension funds react by reducing commissions routed to the affected broker. The response is strongest when the scandal results in large fines, when the broker offers only execution services, and when the institution and broker share a stronger prior relationship. Conversely, the reaction is muted for mutual funds likely to have internal monitoring capabilities. Together, our results suggest that institutional investors rely on trust when making order routing decisions.

Keywords: Reputation, Dark Pool, Broker, Institutional Investor, Pension Fund, Mutual Fund, Trust

JEL Classification: G10, G23, G24, L14

Suggested Citation

Battalio, Robert H. and Corwin, Shane A. and Jennings, Robert H. and Rizzo, Antonino Emanuele and Zambrana, Rafael, The Role of Reputation in Financial Markets: The Impact of Broker Dark Pool Scandals on Institutional Order Routing (May 20, 2024). Available at SSRN: https://ssrn.com/abstract=4172424 or http://dx.doi.org/10.2139/ssrn.4172424

Robert H. Battalio

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
574-631-9428 (Phone)
574-631-5255 (Fax)

Shane A. Corwin (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

240 Mendoza College of Business
Notre Dame, IN 46556-0399
United States

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-2696 (Phone)
812-855-5875 (Fax)

Antonino Emanuele Rizzo

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Rafael Zambrana

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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