The Cost of Institutional Equity Trades: An Overview

Rodney L. White Center for Financial Research Working Paper Series #8-98

Posted: 6 May 1998

See all articles by Donald B. Keim

Donald B. Keim

University of Pennsylvania - Wharton School

Ananth Madhavan

BlackRock, Inc.


This paper examines the empirical evidence on the cost of equity trades for institutional investors. There is considerable practical and academic interest in the measurement and analysis of trading costs. We discuss some of the results that emerge from the recent literature on institutional trading costs and augment those finding with new evidence from a large sample of institutional trades. The evidence we discuss includes: (i) implicit trading costs (such as the price impact of a trade and the opportunity costs of failing to execute) are economically significant relative to explicit costs (and relative to realized portfolio returns); (ii) equity trading costs vary systematically with trade difficulty and order placement strategy; (iii) differences in market design, investment style, trading ability, and reputation are also important determinants of trading costs; (iv) even controlling for trade complexity, there is considerable variation in trading costs across institutions; (v) accurate prediction of trading costs requires more detailed data on the entire order submission process, especially information on pre-trade decision variables such as the trading horizon. We also discuss the implications of equity trading costs for policy makers and investors. For example, the concept of "best execution" is difficult to measure and, therefore, enforce for institutional investors.

JEL Classification: G12

Suggested Citation

Keim, Donald B. and Madhavan, Ananth, The Cost of Institutional Equity Trades: An Overview. Rodney L. White Center for Financial Research Working Paper Series #8-98. Available at SSRN:

Donald B. Keim (Contact Author)

University of Pennsylvania - Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7685 (Phone)
215-898-6200 (Fax)

Ananth Madhavan

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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