Institutional Trading and Soft Dollars

32 Pages Posted: 15 Jan 1998

See all articles by Jennifer S. Conrad

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School

Kevin M. Johnson

Aronson+Johnson+Ortiz

Sunil Wahal

Arizona State University (ASU) - Finance Department

Date Written: November 1997

Abstract

This paper examines the release of trades to the brokerage industry; proprietary data on the trades of 33 institutions totaling $124 billion allow us to distinguish between trades directed to soft dollar brokers and those directed to brokers for pure execution purposes. We find that institutions' choice of brokers depends largely on trade difficulty and on the investment style of the institution. We estimate a shadow price for soft dollar rebates by examining the execution cost of trades executed by soft dollar brokers to comparable trades executed by other brokers. Our estimates put the incremental cost of soft dollar execution at 23 basis points per trade, representing approximately one-third of the total costs of the average trade. If, in addition to controlling for trade characteristics, we also control for institution-specific differences in execution costs, we find that soft dollar trades cost approximately 11 basis points (or about 17%) more than non-soft-dollar trades.

JEL Classification: G10, G18

Suggested Citation

Conrad, Jennifer S. and Johnson, Kevin M. and Wahal, Sunil, Institutional Trading and Soft Dollars (November 1997). Available at SSRN: https://ssrn.com/abstract=53500 or http://dx.doi.org/10.2139/ssrn.53500

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Kevin M. Johnson

Aronson+Johnson+Ortiz ( email )

230 South Broad Street
20th Floor
Philadelphia, PA 19102
United States
215-546-7500 (Phone)

Sunil Wahal (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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