How Broker Ability Affects Institutional Trading Costs

Abstract

This paper demonstrates that broker research and trade execution ability has a significant impact on the cost of institutional trading. The results reveal that there is significant variation in the ability of brokers to control execution costs. Trades executed by brokers with stronger research ability exhibit a higher permanent price impact while those executed by brokers with better execution ability exhibit a lower temporary price impact. Brokers are also found to specialise on an industry level which gives rise to variation in ability within a brokerage house.

Keywords: transaction costs, institutional trading

JEL Classification: G10, G20