Brokerage Commissions and Institutional Trading Patterns

46 Pages Posted: 12 Apr 2004 Last revised: 4 Aug 2008

Paul J. Irvine

Neeley School of Business

Michael A. Goldstein

Babson College - Finance Division

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: November 18, 2007

Abstract

The institutional brokerage industry faces ever increasing pressure to lower trading costs, which has already driven down average commissions and shifted volume towards low-cost execution venues. However, traditional full-service brokers that bundle execution with services remain a force and their commissions are still considerably higher than the marginal cost of trade execution. We hypothesize that commissions constitute a convenient way of charging a prearranged fixed fee for long-term access to a broker's premium services. We derive testable predictions based on this hypothesis and test them on a large sample of institutional orders from 1999-2003. We find that institutions negotiate commissions infrequently, and thus commissions vary little with order characteristics. Institutions also concentrate their order flow with a relatively small set of brokers, with smaller institutions concentrating their trading more than large institutions and paying higher per-share commissions. These results are stable, consistent with our predictions, and cannot be explained by cost-minimization alone. Finally we discuss the evolution of the institutional brokerage market within the proposed framework and make predictions about the future developments in the industry.

Keywords: Commissions, Brokers, Institutional Trading, bunching

JEL Classification: G23, G24

Suggested Citation

Irvine, Paul J. and Goldstein, Michael A. and Kandel, Eugene and Wiener, Zvi, Brokerage Commissions and Institutional Trading Patterns (November 18, 2007). Available at SSRN: https://ssrn.com/abstract=528288 or http://dx.doi.org/10.2139/ssrn.528288

Paul J. Irvine (Contact Author)

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Michael A. Goldstein

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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