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Institutional Costs

In: Business and Management

Submitted By lbott
Words 546
Pages 3
Trading costs for financial institutions are very high. Sometimes, a portfolio of well selected securities that would otherwise produce high returns, in fact ends up with subpar performance because the execution and implementation of their trading strategies is way too expensive. A great deal of research exists on the performance of hedge funds, mutual funds, pensions and the like, however, the performance of trading desks, a key financial intermediary, responsible for trillions of dollars in execution, has largely been overlooked by researchers. Because of this, the authors of “Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs” set out to examine data on both Institutional trading desks and their brokers.
The authors examine a large data set, created with 48 million tickets, containing stock identifiers, which allow for gathering other relevant data such as stock prices and volume at the time of the trades as well as the names of the institutions and the brokers involved in the transactions. The authors measure trading cost by the execution shortfall, a comparison of “the execution price with a benchmark price that is observed when the trading desk sends the ticket to the broker” (Performance, 559). Trading desks are then sorted into quintiles based on execution shortfall in the portfolio formation month. The authors then control for economic determinants of trading costs to ensure that data is comparable across different economic cycles. They then examine the relationship between trading costs and institutions abnormal holding period returns to determine whether institutions with high trading costs are those that are sacrificing trading cost for the opportunity take advantage of valuable private information. Next the authors control for the quality of institutional trading desks to isolate the contribution of brokers to…...

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