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

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